JD Sports Fashion (LSE:JD) is a classic case of a UK growth stock. With the share price down 22% over the past year, it mirrors the performance of many other growth stocks that have fallen out of fashion with investors. Yet I don’t think it’s time to position myself solely in defensive companies. And the jump in JD Sports shares in the past month leads me to consider whether to buy now. Here’s what I decided.
Short-term bump gets traction
The main reason for the jump recently can be put down to the annual results released in June. It highlighted the doubling of profit before tax to £654.7m, up from £324m the year before. Part of this was due to high gross profit margins. If the 48% figure from 2020 wasn’t enough, it improved to 49.1%.
In total, it was a solid report and the jump in the share price was warranted. The fact that the shares have carried the momentum forward and are still rising shows me that investors are quickly re-pricing expectations. The report also noted that trading so far this year is up 5%. Even with some concerns about the outlook, I think some are already thinking that the next financial year could outperform.
Another reason for the jump came earlier this month, with the announcement of a new chairman. The process to find a chairman has been going on for a while now, so the arrival of Andy Higginson this month will be of comfort for management.
Messy merger still stings
Despite the jump, the share price is still down over a longer one-year period. One reason behind this has been the messy attempted merger with Footasylum. The regulator flagged up a serious lack of governance in place around the negotiations, as well as competition issues. This ultimately resulted in the move being blocked, plus a fine of £4.7m.
I think this dampened the share price as investors were initially optimistic about the deal and what it could mean going forward. Not only has this optimism been removed, but it has flipped to adding reputational damage to the JD Sports brand.
It was a headache of a saga over the past year. The management team really need to sort out the approach for future acquisitions, otherwise this is a risk to future share price performance.
Long-term value for JD Sports shares
If the share price jump had been over the course of the past few days, I’d be more cautious. However, it’s been a sizeable jump over a month now. This leads me to conclude that the tide may have truly turned.
The price-to-earnings ratio is a modest 10.89, which looks fair value to me. Even with concern around the UK economy, JD Sports is well diversified around the world. In fact, last year it generated 30.5% of its revenue from the US and 23.9% from Europe.
I’m also impressed to see that 33.8% of revenue came from channels excluding stores, such as online and via mobile. This makes the business more sustainable in the long run, in my opinion, with shifting consumer patterns.
On that basis, I think now is a good time to buy JD Sports shares and am looking to do so myself.
