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Why JD Sports shares are on my watch list

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Retail chain JD Sports’ (LSE:JD) shares should well be worth keeping an eye on, as it looks in good shape to build on the c.70% share price rise it has enjoyed over the past year.

The office being temporarily replaced by home working has led to an increase of independent exercise, and demand for sportswear.

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Alongside online trading, this has enabled JD Sports to overcome many of the trading headwinds created by the coronavirus pandemic, and lockdowns around the world.

Ties and that ‘big night out’ wear have been swapped for trainers and ‘athleisure’ products.

The latest share price to earnings ratio is 26, and recent acquisitions to the group increase its chances of growth and value for this year and beyond, I believe presenting me with a timely opportunity for investment in JD Sports shares.

Why I’m bullish

Recently a $495 million deal was completed to take over DLTR Villa, which operates 247 stores across the United States, under the Sneaker Villa and DLTR brands.

It’s a deal that will expand JD Sports’ presence stateside, following its M&A activity buying sportswear retailers Finish Line in March 2018, which at the time had outlets in 44 states.

The deal contributed to a significant rise in JD’s share price throughout 2019 before being halted by the pandemic.

Over the past three years, its share price has accelerated by a huge 144%. And the retailer’s total revenue jumped from £4.7 million in 2019 to £6.1 million last year.

Additionally, the group’s European footprint was extended by the purchase of the Poland-based Marketing Investment Group, which sells several ranges of sportswear fashion.

In another positive move, a 65,000 square feet warehouse has been opened by the group in Ireland to clear trade hurdles caused by Brexit, as tariffs are now incurred distributing goods imported from Asia to Europe from the UK.

Growth forecasts for this year are optimistic, too, with a 5-10% predicted pre-tax profit for the 2021/22 financial year in the latest trading statement released in January.

Despite the continued frustration of temporary store closures in a global scale, demand remained robust in the second half of this year.

Group profits are anticipated to be £400 million up to January this year, climbing above current market expectations, which average £295 million.

No wonder then that the group retained 90% of its sales in the opening six months of last year.

This was largely due to mature online markets for the group’s outlets in Northern Europe and the United States, which is widely perceived as having the most advanced online trading market in the world.

Analyst McKinsey anticipates that the pandemic will continue to have a long lasting impact for sporting goods chains.

Digital commerce is an obvious change, but it expects demand for products that suit outdoor individual sports, and home exercise to increase this year.

Potential risks to monitor

Yet challenges could arrive from uncertainly over sports participation indoors and over team sports, factoring in potential Covid-19 infection waves and a slow vaccine roll-out in some countries.

The direct-to-consumer market is also estimated to have accelerated during the pandemic.

However, the group has a healthily relationship with brands such as Adidas and Nike, which should result in a sizeable allocation of their products to sell online and at its stores for now.

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Peter Taberner does not own any shares in JD Sports. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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