JD Sports will get back on track
This sportswear retailer was a profitable trade in 2019 and is worth watching again
The current market turbulence has provided some opportunities to revisit some tips that have previously proved profitable for this column. One of these is JD Sports, which nearly doubled in value when I tipped it for much of 2019. Since then, the firm has experienced a roller-coaster ride. During the initial days of the pandemic it lost two-thirds of its value, but then quadrupled, leading to a five for one stock split last November. However, in the last six months it has slumped again, nearly halving in price, so it is now cheaper than when I recommended closing the position in November 2019.
There are some logical reasons why investors are wary of the company. Rising prices and potential supply-chain problems in China threaten margins, while many worry that consumers will choose to respond to rising energy and food costs by cutting back on discretionary spending on clothes. There is also the risk that people returning to the office will switch from casual “athleisure” to smarter clothes – bad news for a company that makes its money from selling tracksuits, shoes and sportswear. Finally, there has been tension between executive chairman Peter Cowgill and some shareholders over his pay.
JD’s enduring appeal
However, these problems are much less serious than you might think. Even before the pandemic, the worlds of sportswear and fashion had begun to merge, with people willing to pay large sums of money for branded apparel, especially limited editions of shoes. JD Sports’ close relationship with companies such as Nike and Adidas – with Nike considering it a strategic partner – puts it in a good position to offer access to these high-margin items, as well as providing a moat against potential competitors.
Most importantly, JD Sports has an impressive record of growth with sales increasing each year, even during the pandemic, with overall sales tripling between 2016 and 2021, all while maintaining a high double-digit return on capital expenditure. The company also has a clear plan for maintaining this growth, especially in the United States, helped by several acquisitions over the past few years, including The Finish Line in 2018, Shoe Palace in 2020 and DTLR last year. It is also trying to increase its sales in Europe.
The combination of high growth and a falling share price means that it now trades at the bargain price of only 10.3 times forecast earnings for 2023. Of course, just because a share offers great value, doesn’t mean that it can’t be caught up in the current market turbulence, at least in the short run. Given that it has fallen so fast in such a short space of time, and that it is still trading below both its 50-day and 200-day moving averages, I’d hold off until it rises a bit to 140p. Once that happens, I’d go long at £20 per 1p, with a stop loss of 95p. This would give you a total downside of £900.