Why did RBC downgrade JD Sports Fashion despite its 15% rally this year?

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Investing.com - RBC downgraded JD Sports Fashion PLC (LON:JD) to Sector Perform from Outperform, citing challenging conditions in the sports fashion sector and a year-to-date rerating in the shares.

The firm noted that the sector outlook remains tough and promotional, particularly in JD’s largest market, the United States.

RBC expects a K-shaped consumer pattern to persist in the U.S., which accounts for approximately 38% of JD’s sales, with lower-income shoppers sensitive to cost-of-living pressures including higher gas prices. The firm also pointed to a lack of brand heat for major brands such as Nike in footwear and tougher comparable sales ahead for JD’s North America business.

In Europe, representing about 34% of sales, JD is on track with distribution improvements including automation and faster replenishment, though the company faces challenges in Germany where parts of the market favor mono-brand retailing.

RBC expects some consolidation of JD’s store footprint in Germany over the next year.

The U.K. market, accounting for roughly 25% of sales, is expected to remain tough and promotional as major brands seek growth, leading to excess inventory. RBC noted that JD’s core younger customer base is particularly exposed given employment pressure and cumulative inflation.

RBC reduced its fiscal 2027 pretax profit forecast by 2% to the lower end of JD’s range and models 3% to 4% below consensus for fiscal 2028. The firm noted that JD has rerated by around 15% year-to-date and now trades at 8 times calendar 2027 estimated price-to-earnings ratio.

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