JD Sports Fashion shares: an incredible investment opportunity or a value trap?

After a big fall on the back of a profit warning, JD Sports Fashion shares now look very cheap. But could they get even cheaper?

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JD Sports Fashion (LSE: JD.) shares have tanked this year. At the start of 2024, they were changing hands for 166p. Today, however, they can be snapped up for just 113p.

After this fall, the stock looks really cheap. The question is – is this an amazing investment opportunity or a ‘value trap’?

A great buying opportunity?

It has now been over a month since JD Sports Fashion released a profit warning. So, analysts have had time to make revisions to their earnings forecasts.

Looking at the current forecasts, there does appear to be a lot of value on offer here. With the consensus earnings per share (EPS) estimate for the year ending 28 January 2025 sitting at 12.8p, the forward-looking price-to-earnings (P/E) ratio is just 8.8. That’s a very low valuation, which suggests that there could be a real opportunity for patient, long-term investors who are willing to wait for a rebound.

It’s worth noting that we have the Paris Olympics coming up soon. This event could give the sportswear/athletic footwear markets a boost, and potentially benefit the retailer.

One other factor that indicates that there could be some value on offer here is director dealing. Between 17 and 19 February, three insiders – including the CEO and the wife of the Chairman – purchased shares. This signals that the insiders (who are likely to have more information on the company than you or me) believe the shares will recover. Directors don’t buy company shares if they think the share price is going to go down.

A value trap?

Looking at the other side of the coin, however, there is quite a bit of uncertainty in relation to spending in this area of the retail market right now.

In its trading update posted in early January, JD Sports Fashion said that trading had been “softer and more promotional” than it anticipated, reflecting more cautious consumer spending patterns.

Could this backdrop get worse before it gets better? Possibly. Much is likely to depend on the timing of interest rate cuts.

Another potential factor to be aware of is higher costs (and supply chain issues) due to the disruption in the Red Sea. Recently, Adidas delivered 2024 profit guidance that was well below analysts’ expectations, with the CEO stating that “exploding” freight rates are driving up costs.

This issue could have an impact on JD’s near-term profits. So, I don’t think we can rule out another profit warning (and hit to the share price).

My view

Putting this all together, it’s hard to know if the shares are a great buy or a value trap. There is quite a bit of uncertainty right now.

My gut feeling is that today’s share price will turn out to be a bargain at some stage in the future. So, I’m tempted to buy a few shares for the long term.

However, I do think we could see further volatility in the near term while economic uncertainty is elevated.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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