The first half of 2024 was tough for shareholders in JD Sports Fashion (LSE: JD). The retailer’s share price fell by more than 20% on 4 January, after management warned of softer demand and cut profit guidance for the year.
The shares haven’t recovered yet. But the company has a long history of strong growth and is continuing to expand in the huge US market. Reassuringly, in my view, management says that trading so far this year has been as expected.
Will JD shares stage a comeback during the second half of this year? I’ve been taking a look and here’s what I think.
Why I’m expecting a recovery
JD Sports sales rose by 4.1% to £10,542m last year. But higher costs and more promotional discounting meant that its adjusted pre-tax profit fell by 8% to £917m.
Given the tough consumer backdrop, I don’t think these were terrible numbers. But they didn’t show the growth investors have come to expect from this business.
A sales slowdown at key supplier Nike wasn’t helpful either. The US firm has been criticised for a lack of product innovation and exciting new launches, and is facing increased competition from newer brands.
My view on this situation is that we’re probably close to the low point in the economic cycle. At some point, consumer spending will recover somewhat. My guess is that Nike – one of the biggest global brands in sports – will also find its mojo again.
When this happens, I think we could see a strong recovery in profits for JD Sports.
Broker forecasts suggest JD’s pre-tax profit could rise from £917m to £977m this year and £1,100m in 2025/26. If JD can hit these forecasts, then I think the shares could rise significantly above current levels.
What could go wrong?
Fundamentally, I think it’s a decent business. Operating profit margins of around 9% are good for a retailer and the group’s cash generation also seems strong to me.
The main risk I can see is the company’s aggressive approach to expansion, often through acquisitions.
The decision to acquire US retailer Hibbett for £899m in April looks logical to me. JD already had a decent footprint in the US. Buying Hibbett should fill in some of the geographic gaps.
However, such big deals are complex and always carry some risk. If performance disappoints, earnings could suffer, and the company could be left with a hefty debt pile to repay.
My verdict
At the time of writing, JD Sports shares are trading on a 2024/25 forecast price-to-earnings ratio of less than nine. On balance, I think that’s probably attractive value for this business.
I expect the share price to recover this year’s losses over time and perhaps hit new highs. This could happen during the second half of the year, if the company reports an upturn in trading.
However, timing share price moves is impossible. A recovery might take a little longer than this, especially if US consumer spending remains sluggish.
I see JD Sports as one to consider today, but I’d take a medium-term view and would plan to hold the shares for several years at least, unless the outlook changed significantly.
