I have liked the investment case for retailer JD Sports (LSE: JD) for a while. I bought some shares over the past few months – and have seen the value of my investment shrink. The JD Sports share price is now down 35% over the last year.
So, is this a bargain buying opportunity for my portfolio? Or does the tumbling share price reflect deeper problems that could drive it down even further?
The falling JD Sports share price
Normally if a company grows its sales and profits, that is seen as a good thing. JD has been doing exactly that. The company expects headline profit before tax and exceptional items for last year to be around £940m. It has already said it expects its current financial year to be at least as strong.
The company also has a history of growing sales. Revenue for 2021 of £6.2bn was only a smidgen higher than the year before. But it was still close to double the sales of just three years previously. JD is a well-oiled machine that has grown sales and profits strongly over the past few years.
Yet the JD share price has been tumbling.
So, why has the share price been falling despite broadly positive business trends?
Challenges for JD Sports
The first answer is that the company has been a victim of its own success. Having recorded such impressive business growth numbers, analysts worry that the company may not sustain its revenues and profits in future. For example, US government stimulus gave consumers a lot of money to spend, and now the programme has ended, it may affect the company’s US sales. That has weighed on the share price.
I think that helps explain why the company has already issued upbeat forecasts for its current financial year. But the risk of falling sales and profits is not the only concern to dog the JD Sports share price. Its results for last year have been delayed, to give the company’s auditor more time. That delay was also a way of enabling the company to review its governance processes. Such delays often make investors nervous. The abrupt resignation of its executive chairman this month has also shaken investor confidence.
My next move
Although at face value those events could seem alarming, I think the company’s keenness to get the right governance structure for the business is a positive thing. It could help improve future management accountability and transparency. In a business that has experienced fast growth, that is an important thing to do.
The company has a strong set of brands. Its operational excellence is demonstrated, in my view, by the speed with which it has grown sales and profits over the past few years. JD Sports has embraced the risk posed by digital commerce and turned it into an opportunity by scaling up its own online sales channels.
The current JD Sports share price values the whole company at £6.4bn, less than seven times the expected headline profit before tax and exceptional items for last year. I see that as a bargain and would consider buying more shares for my portfolio.
