It is something of a mystery to me. JD Sports (LSE: JD) is a rare British global retail success story. It is consistently profitable and has thousands of shops spanning the globe. Yet the JD Sports share price has fallen by 52% over the past five years and stands in pennies.
Clearly, not all investors share my enthusiasm for the business.
I see it as a share to consider – but what might it take for the price to rise rather than fall further?
Turning sales growth into profit growth
I think a key factor will be proving that the company’s strategy of recent years has delivered at both the top and bottom lines.
JD Sports went on a spending spree, acquiring large rivals in the US and on the Continent. At the same time, it opened hundreds of new shops of its own.
That ate up a lot of money. But the acquisitions are now complete and the shop opening programme has slowed down.
So, with expenditure no longer required at the former level, the thinking is that the sales growth from this strategy ought to translate into profit growth.
Like-for-like sales decline
But for now I think that remains to be seen.
In a trading statement issued today (20 November), the company said that (excluding exchange rate moves), total sales for the first nine months of this year grew 8.1% year on year. But like-for-like sales declined 2.2%.
So, what helped JD Sports report positive not negative sales growth was its larger number of shops, not sales growth at an individual store level.
Ahead of its most important trading period this quarter, the company said that it expects profit before tax and adjusting items to be within the lower end of current market expectations. That is not a profit warning, but it is suggestive of a tough trading environment.
A different retail context
In fact, news like that could mean the JD Sports share price continues to fall rather than grow.
The company has a proven model and over the long term I think its expansion in recent years could reap big rewards.
In the short term, though, it is battling a retail context that is more challenging than it was a few years ago. The company said today that both macroeconomic and consumer indicators have been weaker in recent years. That could see fewer consumers splashing out on pricey trainers and kit.
Part of the appeal of the JD Sports investment case has been its youthful shoppers’ willingness and ability to splash the cash somewhat independently of what the wider economy is doing.
That seems to have changed over the past year or so, helping explain the decline in like-for-like sales revenues.
Consumer spending looks increasingly fragile to me. If that leads to further sales declines this quarter, I think it could be bad news for the share price.
By contrast, any strong evidence of spending resilience could help move the share up, I reckon.
In the short term, I think the JD Sports share price may keep moving around and could still sell for pennies.
As a long-term investor, I continue to think the profitable retailer with its large customer base and shop estate is undervalued.
From a long-term perspective, I see it as a share for investors to consider.
