Since May 2024, the JD Sports Fashion (LSE:JD.) share price has tanked 28%. But without last month’s positive reaction to the self-styled ‘King of Trainers’ preliminary results for the 52 weeks ended 1 February (FY25), the situation would have been much worse.
Since announcing an expected adjusted profit before tax (PBT) of £915m-£935m on 9 April, the share price has soared 28%.
But it’s a different story today (21 May). This morning, the group confirmed its adjusted PBT for FY25 was £923m. No surprise there. And it announced a 11.1% increase in its dividend. This sounds like good news to me.
However, by mid-morning, the shares had tanked around 8%.
What’s going on?
After taking a closer look, I think it must be the trading update that’s spooked investors.
Although everything’s said to be in line with expectations, during the 13 weeks to 3 May, like-for-like (LFL) sales were down 2%. However, excluding the impact of currency movements, acquisitions and disposals, organic sales were up 3.1%. Using this measure, all regions reported growth.
In my opinion, although LFL sales is a useful key performance indicator, it’s overall revenue growth that matters.
Although describing the market as “volatile and promotional”, particularly online, the group’s managed to maintain its gross margin. Encouragingly, it’s steadfastly refused to engage in extensive discounting, which is widely deployed in the sector.
On reflection
After the progress that’s been made in recent weeks, it’s disappointing to see such a negative share price reaction to today’s news.
It suggests to me that although many investors (like me) believe the group’s shares offer good value, the majority aren’t yet convinced that the company’s going to grow like a FTSE 100 company should. This means any slightly disappointing news – like the first quarter fall in LFL sales – makes them nervous.
And although the company’s increase in dividend is significant in percentage terms, the stock’s yield is poor. Therefore, the investment case relies on a strong growth story rather than generous dividends.
Adjusted PBT for FY26 is expected to be in line with the current consensus of analysts of £920m. If realised, this is less than in FY25. But there’s a wide variation (£878m-£982m) in the forecasts.
Understandably, the company’s cautious about the impact of President Trump’s tariffs. Following the acquisition of Hibbett, the US is a key market for the group. Assuming higher import taxes are passed on to customers, there’s likely to be a drop in demand. If they are absorbed by the company then earnings will fall.
It’s a lose-lose situation. As expected, the directors are “monitoring the position carefully”.
As a shareholder, I don’t see much in this morning’s press release to change my view about the company’s prospects. Current trading’s okay and its top line is growing. Also, its recent expansion in America and Europe helps to remove a reliance on the UK where economic conditions appear fragile.
And even after the recent share price rally, the stock still appears cheap to me. It’s trading on seven times FY25 earnings.
For these reasons, I plan to hold on to my shares.
