This year, many FTSE 100 stocks have been hit hard. JD Sports Fashion (LSE: JD.) is a good example. Year to date, it’s down about 56%. Now, like many other UK companies, JD is facing some challenges right now. Supply chain issues and the cost-of-living crisis are creating some uncertainty. However, a 56% fall in the share price strikes me as excessive.
Given the huge dip, I’m thinking about buying shares in the retailer. I believe there’s the potential for a sizeable rebound in the share price in the not-too-distant future.
Why I like this FTSE 100 stock
After the big share price fall, JD Sports Fashion shares now look very cheap. Currently, analysts expect the FTSE 100 company to generate earnings per share of 12.6p this financial year, putting the forward-looking price to-earnings ratio at about 7.5 (assuming the earnings forecast is reliable). That valuation strikes me as very low.
This is a company with an excellent track record when it comes to growth. Between FY2017 and FY2022, sales increased from £1.8bn to £6.2bn. And in the first half of this financial year (ended 30 July), sales came in at £4.4bn, up 14% year on year.
It’s also a company that stands to benefit from a number of powerful trends in the years ahead. One such trend is the increasing focus on health and wellness. As a seller of trainers and athleisure, JD is essentially an ‘enabler’ here. Another trend is the ‘casualisation’ of fashion which is, in part, linked to the increasing prevalence of remote work.
Given the company’s track record and the potential for further growth, I think the stock looks like a bit of a steal right now. And I’m not the only one who sees value here. Recently, analysts at Berenberg named this FTSE 100 stock as a ‘top pick’. Meanwhile, analysts at Peel Hunt said that JD’s share price does not reflect the “strength of its global position” and its cash pile.
Risks to consider
Of course, there are a few risks to consider here. I think the main risk right now is consumer spending. If consumers continue to tighten their belts due to high energy and food costs, JD Sports Fashion could be impacted negatively. Having said that, during the Global Financial Crisis of 2008/2009, JD’s revenues held up well.
Another key risk is supply chain challenges. Recently, I went looking for a pair of white Nike Air Force 1 trainers (one of the retailer’s top selling shoes) and no JD Sports stores, or the website, had my size. That’s a worry.
At the same time, excess inventory could be a problem. Recently, both Nike and Adidas have had problems in this space. This could lead to discounting.
Finally, there’s the fact that Peter Cowgill recently left the company. He was instrumental in building JD Sports into the powerhouse that it is today. The new CEO, Régis Schultz, doesn’t have any specialist sporting experience.
My move now
To my mind, however, these risks are baked into the share price and the valuation right now. So I’ve moved the FTSE 100 stock onto my list of shares to buy.
Given the low valuation, I think the stock has the potential to deliver attractive returns in the medium to long term.
