I invested in JD Sports Fashion (LSE:JD.) nearly a year ago and it’s been a rollercoaster ride ever since. The FTSE 100 stock was down more than 50% in three years when I bought in at 97p, yet still managed to shed another 30% by April.
Then it mounted a recovery and I was up, just, by late August. Now though, the share price has pulled back to 91p. The meagre dividend hasn’t made up the difference, so I’m down slightly on my position.
Opportunity cost
Part of me thinks I should wait for a potential recovery. Another part thinks I should buy more shares while they’re trading at just seven times forward earnings. Lots of bad news already appears priced in here.
But there wasn’t much good news in the sportswear retailer’s recent half-year report. Sales jumped 18% to £5.94bn, but that was driven by store openings and the acquisitions of Hibbett in the US and Courir in France. Like-for-like sales fell 2.5% and pre-tax profit before adjusting items declined 13.5%.
Management warned about the “tough trading environment” and “strained consumer finances”. And it remained “cautious on the trading environment for the second half“.
Waiting for a meaningful turnaround might turn into a very long game (more like Waiting for Godot). There’s opportunity cost associated with holding on to a stock for too long, especially one yielding just 1%.
I prefer this growth stock
By contrast, I believe On Holdings (NYSE:ONON) — whose products JD Sports sells — offers me a better potential opportunity over the next five years.
The Swiss premium sportswear brand (which is US-listed) is defying the tough consumer spending backdrop. In Q2, net sales rose 32% year on year to CHF749.2m (38.2 % at constant currency). Direct-to-consumer sales jumped 47.2 % and wholesale sales grew 23.1%.
The company’s net sales in EMEA (Europe, Middle East and Africa), the Americas, and Asia-Pacific increased by 46.1%, 23.6% and 110.9% on a constant currency basis, respectively. It’s almost like there are no consumer spending issues at all!
On now has nine distinct footwear franchises, each contributing more than 5% to its top line. But it’s also growing rapidly in the apparel category, which JD Sports says is proving resilient.
Meanwhile, On has been collaborating with Loewe, LVMH‘s Spanish luxury fashion house, at “very, very high price points”. And the firm’s margins are industry-leading, with the gross profit margin rising 160 basis points to 61.5% in Q2. The adjusted EBITDA margin reached 18.2% (up 220 basis points).
The fact that the company is growing so strongly despite the tough consumer environment is very impressive. Management is guiding for full-year net sales growth of at least 31% (constant currency).
But there are risks, including tariff uncertainty. And if AI starts eating away at entry-level jobs, the younger consumers driving a lot of the brand’s growth could end up tightening their belts.
Nevertheless, On is taking market share, growing rapidly, and has a large opportunity in apparel. It’s founder-led, with an ambition to become the world’s “most premium global multi-sports brand“.
The icing on the cake here is valuation. Down 33% since January, the stock is trading at 27.7 times forward earnings. That looks very attractive compared to Nike’s 40, and JD Sports’ uncertain growth outlook.
So I’m selling JD and buying On.
