When the share price of a leading FTSE 100 company falls off a cliff, my interest levels always perk up. It’s clearly a dangerous strategy to buy a stock on the sole basis that it has crashed. However, I am keen to know more about how the business operates, and then decide whether it is a bargain.
Profit warning
The stock in question is major athleisure retailer, JD Sports (LSE: JD.). Since just before Christmas, its share price has fallen a huge 40%. Fuelling the decline was a £100m downgrade to profit announced in the New Year.
Management put down a significant part of this downgrade to the unusually mild weather in autumn, which hit UK clothes sales. However, this fact alone could not possibly account for its share price meltdown.
Of greater concern to the market, I believe, is that it was caught off guard in terms of promotional activities.
During the peak December trading period, it decided not to discount in the UK. Although sales volumes took a hit, margins held up. However, it was a different story in the US.
Promotional activity on the other side of the pond was spread out across the market, including footwear and general apparel. Its competitors were discounting by as much as 25% and took it completely by surprise. Its lack of market presence left it with little option but to participate.
Consumer slowdown
Last year, buoyant consumer spending was a big contributing factor as to why both the US and UK economies avoided falling into recession.
A huge amount of spending last year was financed through debt, mostly on credit cards. But compounding this has been a surge in growth of buy now, pay later programs.
If someone does not meet the payment schedules under such schemes, interest rates typically jump to around 25%. This is significantly greater than the average credit card interest rate. Compounding of the debt means that a borrower can very quickly run up huge debts in a short space of time.
My fear is that consumers are maxed out on debt and are either unwilling or unable to take on anymore.
Growth trends
JD Sports is growing rapidly. It remains on track to open up 200 new stores worldwide in FY24. Further, it’s investing heavily in its supply chain, opening up new automation distribution centres in the UK and Europe.
It has really tapped into the premium sports fashion industry. All regions are growing, but particularly Europe and Asia Pacific.
It has also become very adept at acquiring fashion stores from distressed retailers. A good example of this was its acquisition of Gap stores in France that will be open up in prime fashion retail locations this year.
My main concern now is that the business could well have engaged in a huge capital expenditure program just as the economy is about to take a turn for the worse.
The consensus view is that inflation has peaked, and interest rates are set to fall. I remain to be convinced on either front.
Regardless, I expect the stock to remain highly volatile throughout 2024 and I will watch from the sidelines for now.
