The way the JD Sports Fashion (LSE:JD.) share price reacted to the company’s results for the 26 weeks to 3 August 2024 (HY25), is a reminder that successful investing requires taking a long-term view.
On 2 October, the retailer’s stock fell 6%. That was the day on which the self-styled ‘King of Trainers’ beat analysts’ expectations. And said that it expects to report a full-year adjusted profit before tax of £955m-£1,035m. Admittedly this is a wide range, but even at the lower end it would be a 4.1% improvement on last year’s results.
The market’s reaction was particularly puzzling given that its trading update on 22 August contained the same earnings forecast, yet its shares rose 10.6% on the news!
This inexplicable response illustrates that short-term price movements are impossible to predict.
However, looking over a longer period, a quality company that’s growing its revenue and earnings should deliver strong share price growth.
And I think JD Sports is an excellent company. That’s why I decided to invest in August.
Reasons to buy
Spending on fashion is closely correlated with wider economic conditions. Most major economies are expected to grow over the next couple of years which should help boost disposable incomes.
Also, with the group’s recent purchase of Hibbett (US) and its planned (subject to regulatory approval) takeover of Courir (France), it’s likely to be less reliant on the British economy than previously. These two sports chains have nearly 1,500 stores between them.
And despite the reaction of other investors, I think the company’s HY25 performance was a good one.
Some have pointed to the significant difference between the group’s statutory figures – those prepared in accordance with accounting standards – and its reported numbers.
| Measure | Reported (£’000) | Statutory (£’000) | Difference (£’000) |
|---|---|---|---|
| Revenue | 5,032.2 | 5,032.2 | – |
| Operating profit | 451.1 | 292.2 | (158.9) |
| Profit before tax | 405.6 | 126.3 | (279.3) |
However, it’s common practice for large companies to remove exceptional (one-off) items when reporting their financial performance.
During HY25, the company closed its distribution centre in Derby and incurred significant professional costs in connection with its acquisitions. It’s also issued options to the minority shareholders in the companies that it’s acquired which, if exercised, requires JD Sports to give them additional shares. Movements in the fair value of these are recorded in the accounts.
But most of these are non-cash items and analysts adjust their expectations accordingly.
Indeed, the retailer comfortably beat the predictions of these ‘experts’, which is another reason why I’m encouraged by the results.
| Measure | Analysts’ forecasts | Actual | Difference |
|---|---|---|---|
| Revenue (£’000) | 4,995 | 5,032 | +37 |
| Operating profit (£’000) | 419 | 451 | +32 |
| Operating margin (%) | 8.4 | 9.0 | +0.6 |
| Profit before tax (£’000) | 384 | 406 | +22 |
Caution
But I’m aware there are potential risks.
It’s estimated that Nike’s products account for 50%-55% of revenue. The American sportswear giant has recently issued a profits warning and replaced its chief executive. Any lasting problems are likely to have an impact on JD Sports.
Indeed, there’s a clear correlation between the share prices of the two.
Also, largely as a result of its acquisitions, JD Sports’ balance sheet contains a significant amount of debt. Its net cash fell from £1.27bn at 29 July 2023, to £41m, at 3 August 2024.
Verdict
But I think the shares offer good value, particularly after this week’s fall. They’re currently (4 October) 21% below their 52-week high. And the stock’s forward price-to-earnings ratio is a reasonable 11.
I’m therefore planning to hold my shares for the long term.
