Passing the mid-point in 2023 seems like a great time to check in with my top pick for the year (selected back in December).
Has FTSE 100 trainer seller JD Sports Fashion (LSE: JD) delivered as I hoped it would?
I’ve beaten the FTSE 100 index!
By last Friday’s close, JD stock had climbed 10% year-to-date.
Now, that sort of return might not be exceptional compared to the glitzy tech titans across the pond. Even so, it’s hardly shabby considering just how many economic headwinds the UK market has been dealing with.
Importantly, it’s a better result than the FTSE 100 index of which JD is a member. The former is now in negative territory for the year.
However, this outcome is also rather frustrating. From January to early February, JD shares were up a stunning 44%.
So, what has happened over those six months to generate such volatility? Let me explain.
Flying start
JD’s stellar start to the year was partly down to a well-received trading update and confident outlook on behalf of management.
The company reported strong revenue growth for the 22 weeks up to the end of 2022 along with a “particularly impressive” six-week Christmas period.
As a result, full-year profit before tax and exceptional items was forecast to be near the top end of analyst projections.
The market always likes that kind of thing.
Unfortunately, those heady days in February weren’t to last.
Despite reporting record profit in May, investors seemed perturbed when JD expressed caution on “the general global macro-economic and geopolitical situation“.
More recently, organic sales growth has slowed. The company has attributed this to the easing of supply chains in the previous year. So, beating those numbers from 2022 was always going to be a challenge.
However, a “softening of trade” in JD’s North American businesses hasn’t helped matters.
International expansion
Overall, I’m satisfied with this solid-but-not-spectacular result. Then again, judging the success of a single call over a short period isn’t the Foolish way.
Our philosophy is to invest in brilliant companies for the long term. So, can JD Sports continue to do well for holders?
I think it’s possible. JD’s plan at the beginning of the year was to continue expanding its international footprint and that’s exactly what it’s been doing. Cue many new store openings and a still-in-progress deal to acquire French peer Courir.
If this all goes to plan, JD could deliver an even better full-year return, especially as the shares still change hands for just 11 times earnings.
No sure thing
On the flip side, there are risks here. Some will likely prove temporary, others less so.
In the former camp, we have an ongoing cost-of-living crisis. While the Bank of England is confident that inflation will eventually fall, there’s no denying that times are tough for a lot of people. Discretionary spending on pricey trainers is easily postponed.
More generally, the retail sector is notoriously competitive and margins are low. So, if I were invested here, I’d be checking that I’m diversified into other parts of the UK market (and overseas).
All that said, it’s encouraging to see that my call on JD has proved fairly successful so far.
I’m hoping for an even better outcome when I next stop by.
