Is the JD Sports share price set to explode?

Christopher Ruane considers why the JD Sports share price has done little over the past five years, even though sales have soared. Will he keep his stake?

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Over the long term, JD Sports has hit the back of the net with investors. In the past decade, the JD Sports share price has soared 589%.

Over the past five years though, the gain has been a meagre 3%. So far this year, the shares have lost a fifth of their value.

Yet while the share price has been moving sideways in recent years, sales have been soaring — and that looks set to continue. So could the JD Sports share price now boom?

I hope so. I have been buying the shares this year!

Long-term sales growth

Last year, revenue hit a record £10.1bn. Compare that to the £3.2bn the company managed five years before that.

And that significant sales rise looks set to continue. Last year, it announced plans to open hundreds of physical stores annually. Today (23 April) it announced plans for a £900m takeover of US rival Hibbett. Hibbett has over 1,100 stores and last year generated around £1.4bn in net sales.

That alone would be a substantial boost to JD’s sales. I expect it can boost the productivity of Hibbett by applying its own well-proven sportswear retail formula.

Add to that JD’s ambitious programme of store openings and long-term track record in sales growth and I expect revenues to move up strongly over the next few years.

Attractive profits but weighty costs

What about profits though? Growing sales can be a lot easier than turning that into profit growth.

JD already operates in North America and indeed its international footprint is one of the things I like about the chain. But British retailers have often found the US a difficult, if not impossible, market to crack.

Added to that I see risks that a weak economy could hurt spending on higher-priced athleisure/sports footwear in the US and more widely. That is a risk to profitability for JD.

The company has done well when it comes to generating high operating profits. Last year, for example, it reported an operating profit of over half a billion pounds. But spending money on growth, such as the cost of new stores, means that the statutory profit last year was a more modest £226m.

Indeed, basic earnings per share of 2.8p last year was a far cry from the 23.8p achieved five years before.

Growth at a price

That EPS decline helps explain why the JD Sports share price today stands close to where it did five years ago.

If the expansion goes poorly – for example Hibbett turns out to be another example of British retailers failing to understand the US market – profits could fall further. And the share price may follow.

The Hibbett deal may yet fall through, or turn out to be costlier if another bidder steps into the fray.

Seen positively though, JD is growing its sales strongly and, over time, that could give it a strong basis for improving its profitability not only overall but also on a per-share level.

Hopefully, the investments today in growth will pay off over the long term. If profits growth follows sales expansion, I think the share price could soar in coming years. I plan to hang on to my JD Sports shares.

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.

C Ruane has positions in JD Sports Fashion. 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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