Only a few years ago, the JD Sports (LSE: JD.) share price was consistently one of the best performers in the FTSE 100. Having peaked in the post-Covid boom at 225p, the stock has more than halved. Last year, it issued multiple profit warnings off the back of weakening consumer confidence.
Having sat on the sidelines, I’m now wondering if the worst of the sell-off is behind it.
Growing business
Over the past decade the company has grown from being predominantly a UK-based retailer to a global player. Seventy percent of its business now comes from overseas. Linked to an expanding store estate and acquisitions, revenues have risen 150% in just five years.
The company’s particularly focused on North America, the largest sportswear market in the world. The acquisition of Hibbett during 2024 added over 1,100 stores to its estate.
However, the pace of store openings has been one area that’s worried me for some time. In the midst of a clearly slowing market, I don’t understand the logic of opening 102 new stores in H1 2025 (reported back in October 2024). With a greater store estate to manage, net finance interest is up £20m year-on-year.
Promotional activity
One ball that management continually seems to mis-juggle is promotional activity by competitors. This was particularly acute in the US leading up to the key Christmas trading period.
The company works on a gross profit margin of 50%, significantly greater than other US retailers. Its full-price proposition clearly resonates with its brand partners. And it does provide its merchandising team with bargaining power when it comes to selecting what it wants, rather than what a brand would like it to take.
The problem for me is that during every recent earnings call management acts surprised by the severity of cuts instigated by competitors. After 2023 Christmas trading, it was equally caught off-guard. Back then, it decided to participate, hitting margins badly. This time it sacrificed some sales to preserve margins.
Weakening consumer confidence
My biggest concern for JD Sports remains economic uncertainty. If I just put aside the tariff issue, I remain to be convinced that the business is out of the woods yet.
Apart from the discounters, virtually every retailer out there at the moment is struggling. Footfall remains down and customers are cautious. Looking at all the major banks, they all report an increase in savings rate.
Another major concern is a tick up in unemployment. Younger generations remain a key customer for the company. But this group has been most impacted by elevated inflation and a reduction in working hours, because many of them have temporary jobs. All the signs point to the fact that we’re heading (or are already in) a recession.
On the surface, the business is trading at a rock-bottom valuation. The price-to-earnings (P/E) ratio remains under seven, well below the FTSE 100 average. Daily revenues might have reached £100m on two occasions in its most recent trading update, but it’s profit that matters, and that was down 64% in H1. I’ll wait for full-year results later this month and reassess the case for investment then.
