The worst-performing FTSE 100 stock so far today (14 January) is JD Sports Fashion (LSE:JD). The JD Sports share price is down almost 10%, hitting its lowest level since 2020. Even though there’s a clear negative catalyst for this move, some investors might see this as a potential for a long-term value buy. Here are the details.
Flagging up profit issues
The business issued a trading update this morning, stating that “we now expect the full-year profit before tax and adjusting items to be between £915m and £935m”. This is down from the previous estimate of £955m to £1.04bn that was last referred to. So in short, this is what people refer to as a profit warning.
The last couple of months of 2024 weren’t as good as expected with like-for-like revenue versus 2023 down by 1.5%. In terms of factors influencing this, the update cited “a challenging and volatile market”. That meant rivals were very promotional, but while maintaining full price supported JD’s margins, it also dented potential sales.
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It wasn’t all bad news, with sales growing in Europe and Asia Pacific, doing some of the work to offset the slowdown in the UK and North America. Further, in terms of segment performance, the Sporting Goods and Outdoor area was a standout worthy of note.
Looking at the bigger picture
The sharp share price reaction to the profit warning shows how sensitive investors are to any signs of weakness at the company.
Part of this does seem to be an overreaction. It’s true that this knocks around 10% off full-year profit before tax. But it’s still a very healthy profit to make. Put another way, there’s no danger of the business becoming loss-making any time soon.
In terms of revenue, it expects it to be flat to the previous year. Yet the revenue from last year was a good performance. For perspective, in 2020 revenue was £6.11bn. The forecast for this year is around £10.5bn. By taking a bit of a step back, investors can have a much clearer picture.
Of course, the profit warning might not be the end of the bad news for the moment. The update said “we are taking a cautious view of the new financial year.” So the risk is that we get more of a spiral downwards before management flip to being more optimistic.
Finding value
I think the stock is worth considering for an investor, based on the potential overreaction to the news today. With a price-to-earnings ratio of 7.93, it’s below the fair value metric of 10 that I use to benchmark. It’s not without risks, but it does appear to be an undervalued stock based on the 26% fall in the price over the past year.
