It has been a difficult week for JD Sports (LSE: JD). Having issued a profit warning barely two months ago, it issued another one this week.
Predictably – and perhaps rightly – the stock market did not like that and marked the share down sharply. It has fallen 45% since September.
Although the business continues to expect large profits for its current financial year, the shifting goalposts when it comes to expectations do not instil confidence in its management.
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That said, the chief executive dipped into his own pocket this week to the tune of £99,000 buying shares in the company after they nosedived following the profit warning.
I also added to my existing shareholding after the profit warning. That is because I think the sports retailer’s share should be able to recover from this latest setback. Yes, it may take some time, but I am a long-term investor.
What’s been going wrong?
The company’s announcement was a bit too self-congratulatory in tone for my taste, something I typically see as raising questions about whether management is really grasping the issues a business faces. But it did contain some hard facts too.
In short, JD said that the market had been tougher than expected – and it expects those tough trading conditions to continue. Like for like revenue fell year-on-year in November but December showed growth.
Although the range of expected profit before tax and adjusting items was lowered, it still sits at £915m—£935m. Set against that, the FTSE 100 firm’s £4.6bn market capitalisation looks very low to me.
Here’s one big concern I have
Clearly though, there are risks. One thing in particular caught my eye in the firm’s statement. It said that the market has been more promotional than it anticipated and that it chose not to participate in that which, in layman’s terms, means it did not lower prices just to match competitors.
I think that is a credible business strategy. But it surprises me that JD, with its massive footprint, had not anticipated in broad terms how promotional its market would be in the period under review.
I am also concerned as to what is driving that promotional activity from rivals. Is it an overhang of unsold inventory, or responding to weaker spending by consumers?
Either explanation could spell trouble for JD in coming months as both suggest that there may be a growing mismatch between supply and demand in the broader market.
JD still has a proven formula
If that happens, it could in due course lead to yet another profit warning from JD – and I think there are only so many profit warnings management can issue before its credibility is shot.
But while I have growing doubts about its current management, the business itself looks robust to me.
The brand is well-established and benefits from a global footprint that gives it economies of scale. It has a proven formula and, even if profits fall, they are still on course to be substantial.
There is certainly risk here, but for the quality of operation JD has proven to be, I think the share price looks too low. That is why I have been buying more of what I see as a FTSE 100 bargain while I can.
