Do I own a stake in JD Sports (LSE: JD) already? Yes. Do I want a bigger one? Yes. If I had spare cash to invest today, would I buy more JD Sports shares with it? Absolutely!
The shares doubled between October and their high point of the past week, but are still 7% cheaper than a year ago. That price action hints at why I am so excited about the opportunity here.
2022 worries
Coming into last year, the business had a long run of stellar performances behind it. In 2021, for example, revenues were £6.2bn and pre-tax profit was £324m. This meant that in the prior decade, the compound annual growth rate was 19.3% for revenue and 17% for profit.
That is an incredible performance to sustain for a decade, underlining some key strengths I see in the business, like its well-known brand and proven retailing expertise.
But last year saw the arrival of new management, bringing a risk that the formerly successful retailer may struggle to match its past glories.
Huge ambition
In fact, the business is going from strength to strength. I think that could propel JD Sports shares higher in coming years.
Total revenue growth in the final six weeks of last year was 20% compared to the prior year period. The company expects headline profit before tax and exceptional items will top £1bn this year, compared to £947m last time round.
This week the company outlined what I see as hugely ambitious growth plans. For the next five years, these include double digit percentage revenue growth, double digit operating margins and annual positive operating cash flows of £1bn.
To help it achieve those demanding revenue targets, the company plans to open 250-350 new shops per year in markets where its presence is currently limited.
Risks and rewards
I am excited by the scale of the firm’s ambition. It has a proven retail formula so scaling it up could be great news financially. Not only can it grow revenues, but by offering more economies of scale, the move could also be good for profit margins.
But there are risks too. Expansion can be costly, so if it does not work out as planned it could actually be a drag on profits.
Meanwhile, recession might dent consumer demand in the coming years. That could be bad for revenues and profits just when JD is focused on expansion. So far though, the chain’s customers still seem happy to spend, spend, spend.
I’m buying JD Sports shares
I am spending too.
Specifically, I have been adding JD Sports to my portfolio. If I had spare cash to invest, I would be happy to buy more today.
The firm reminds me of Walmart in its earlier days, which was a rewarding investment for long-term shareholders including Warren Buffett. It has a proven retail formula, a distinctive customer proposition and lots of space left to grow.
Hopefully, that will add up to a very rewarding formula for me.
