It hasn’t been a good start to the year for JD Sports Fashion (LSE:JD). The release of a trading update this morning (4 January) has disappointed investors. The JD Sports share price is currently at 118p, down almost 24% versus yesterday’s closing price. Here are the key details that I’ve noted.
A slower holiday period
For a retailer like JD Sports, the last quarter of the year is critical. We have the key holiday season where many choose to buy gifts and generally spend on non-essential items. The potential surge in demand is one that can make or break the financial year.
Unfortunately for the firm, it looks like the holiday season wasn’t a great one. The trading update stated that “the peak trading season… was softer and more promotional than we anticipated, reflecting more cautious consumer spending”.
As a result, the business is revising the target for profit before tax for the full-year to between £915m and £935m. If we rewind to the beginning of the financial year, it was targeting a record £1bn in profit. Based on the recent trading, it looks like this won’t be achieved.
Revising down expectations
The sharp fall in the share price tells me that investors are very surprised by this update. Of course, it’s a knee-jerk reaction. As a long-term investor, I’m more focused on where the stock moves over the next year rather than just the next hour. But the scale of the short-term move does need to be appreciated.
I feel that some are concerned about what the softer demand means for 2024. The update noted that some of the blame can be put on the milder weather affecting apparel demand into autumn. This might not be a factor to deal with going forward.
Yet even with this, the more cautious consumer spending could continue this year. After all, we’re hardly out of the woods yet with people feeling the pinch of higher interest rates and elevated inflation. So if JD Sports underwhelms going forward, this could see the share price under further pressure.
Looking at the bigger picture
I think investors need to take a step back and consider the bigger picture. Sure, not hitting £1bn in profit is a shame. But the business has come a long way over the past few years. In 2021, the company recorded a profit before tax of £421m. Just three years later, we’re disappointed about it being around £915m!
Over 200 new JD stores will have been opened in the 2023 full-year, further cementing the potential for growth in 2024. Add into the mix this higher marketing and promotional spending and I believe JD Sports is in a good position to push on.
Ultimately, JD Sports can’t control if the average consumer has the money to spend on the products or not. But as long as it has a sound long-term strategy, it’ll be able to continue to grow (along with the share price).
Despite the disappointing trading update hurting the stock today, I think it’s just a short-term blip that investors shouldn’t be overly concerned about.
