JD Sports Fashion (LSE: JD) is a FTSE 100 share that I’ve had my eye for ages. It suffered a huge 30% drop during the first week of the year following a profit warning, and weakness has persisted ever since.
On 21 November, it experienced another big setback, tumbling 16% in a day after the company released a trading update. Now at 101p, the stock isn’t far off its price during the Covid market crash of early 2020.
Here’s why I seized upon this recent dip to finally add some shares to my portfolio.
Why’s the stock down again?
In its Q3, which covered the 13 weeks to 2 November, JD’s trading was mixed. After a good start to the period, helped by strong back-to-school sales, the sportswear firm said October went very quiet.
It blamed this on a few things, including mild weather, lots of promotional activity, UK Budget uncertainty, and consumer caution ahead of the US election.
Q3’s like-for-like sales were down 1.5% in North America, up 3.5% in Europe, but down 0.3% overall.
For the full year (ending 31 January), management now expects pre-tax profit to come in at the lower end of its £955m-£1.03bn guidance range. For context, it made £917m the year before.
Clearly, the market is worried that October’s weakness will persist into the current Q4. This is the company’s peak trading period, encompassing Black Friday and the Christmas shopping season.
If so, JD could be at risk of missing its annual profit guidance. With consumer spending still weak in the UK, US, and parts of Asia, this cannot be ruled out.
Was it really that bad though?
Stepping back, I don’t think the quarter was dire enough to justify a 16% share price sell-off. Basically, the firm had a good August and September offset by a very weak October.
Admittedly, the US presidential election reason was a bit of a head-scratcher for me at first (and it seems for JD too). But according to market researcher Circana, the election impacted US consumer behaviour by creating a period of distraction and uncertainty that delayed the start of the holiday shopping period.
Discretionary spending fell 9% in the week leading up to and immediately following the election. But this has now passed, and JD is confident moving into the Christmas season.
For Q3, group organic sales growth was actually 5.4%, with another 79 stores opening worldwide. So the long-term growth story isn’t broken here at all, as far as I can tell.
In fact, the firm is displaying far more resilience than many other struggling retailers. It’s taking market share in the US and Spain, while France is performing well following the Olympics.
Meanwhile, there’s a new CEO at Nike, which accounts for 45% of JD’s sales. Perhaps he can reinvigorate the ailing brand and boost sales.
Bargain valuation
The stock currently trades on a forward price-to-earnings (P/E) multiple of 7.3. Even if earnings come in light next year, the forward P/E ratio is still likely to be comfortably under 10. That’s Black Friday territory.
The price-to-sales (P/S) ratio is just 0.5. Taking a long-term view on the stock, that looks like a bargain to me. Therefore, I was happy to snap up JD shares for my portfolio at 95p.
