Until midday on 22 August 2023, it was a quiet week for the JD Sports (LSE:JD.) share price.
But as soon as Dick’s Sporting Goods, which owns and operates a chain of sports stores in the US, announced its earnings for the second quarter of 2023, the UK retailer got caught in the fallout.
Not so clever dick
Dick’s sales were up 3.6% compared to the same period in 2022, but its earnings per share were down 23%. To compound matters, it announced a profits warning.
Its shares fell by 24% and are now at their lowest level since November 2022, when there was considerable uncertainty about inflation and the strength of the US economy.
Remarkably, the company primarily blamed ‘shrink’ — merchandise that goes missing due to theft, fraud, damage, or accounting errors — for the poor performance.
On this side of the Atlantic, JD Sports’s shares immediately fell 5%. And they closed 5% lower the next day.
Relative values
Even though 31% of JD Sports’s 2023 revenue was derived from North America, this seems like an over-reaction to me.
JD Sports achieves a better gross margin on its sales — 47.8% in 2023 compared to 34.6% for its American rival. It’s also able to secure a number of exclusive products from manufacturers.
And its shares appear to offer good value at the moment.
Its price-to-earnings (P/E) ratio is slightly lower than that of other retailers in the FTSE 100. It trades on 10.5 times earnings, compared to 11.2 for Frasers, and 11.8 for Next.
Future plans
But with a dividend yield of just 0.6%, the only reason to own the stock is for its growth potential.
To help assess this, in February 2023, the company published its five-year plan.
To achieve double-digit revenue growth, it intends to open 250-350 stores during each of the next five years. If 10% annual sales growth is realised, revenue will be £16bn in 2028. The company is also seeking a 10% net margin — around £1.6bn — by this date.
Based on today’s P/E ratio, this implies a valuation of £16bn — a 230% upside on its current market cap.
That would be an excellent return.
But it’s easy to prepare a healthy forecast based on ambitious growth rates. Delivering the plan is more difficult.
However, over the past five years, JD Sports has increased its revenues from £4.7bn in 2018, to £10.1bn in 2023. This is a similar trajectory to the published plan for the next five years.
Verdict
I therefore think its possible, but not guaranteed, that the retailer could grow as planned.
None of the problems encountered by Dick’s Sporting Goods seem particularly difficult to overcome. Additional security might cost more in the short term but will ultimately pay for itself. And it’s easy to find better accountants!
Of more concern is the economic outlook. The UK’s growth prospects are uncertain and further interest rate rises are likely on both sides of the Atlantic.
But sales of trendy sportswear have proven to be resilient in recent times. And I see no reason why this should change.
Unfortunately, I don’t have any spare cash right now. But, if I did, I would take advantage of this week’s unexpected share price wobble and add JD Sports shares to my portfolio.
