It’s been a truly shocking start to 2024 for investors in JD Sports Fashion (LSE: JD). The FTSE 100 sportswear retailer delivered a profit warning last week (4 January) and the shares plunged in repsonse.
This means the stock is already down 30% for the year and trading at a 52-week low.
My gut instinct is that this is a market overreaction. So could it represent a great opportunity for me to invest in JD Sports shares while they’re out of fashion? Let’s find out.
Weaker holiday season
As mentioned, JD recently issued a profit warning. In other words, the company informed investors that it expects profits to be lower than it initially projected.
This is unfortunate as CEO Régis Schultz only said a few months ago that the firm was on track to surpass £1bn of adjusted pre-tax profit for the full year. It now expects a figure between £915m and £935m.
Management said growth was impacted by “milder weather…while the peak trading season… was softer and more promotional than we anticipated“.
While £1bn in profits would have been an impressive milestone, £920m-ish certainly isn’t too shabby.
I was digging into JD’s 2010 annual report recently and noticed that its annual profit today is around 20% more than its revenue (£770m) back then. And the adjusted pre-tax profit in FY 2010 was just £67.4m!
Young adults
Now, one advantage the firm was presumed to have by some was that its average customer — aged 16-24 — would be more immune to cost-of-living pressures.
Indeed, last year the chief executive commented: “Young adults…are less impacted by the mortgage rates [increases] as they tend to stay at home with mum and dad”.
There’s a bit of doubt about this now, probably adding fuel to the sell-off in the shares.
The Nike partnership
Nonetheless, I think some perspective is helpful. The company still expects full-year organic revenue growth to be around 8%. And it opened over 200 new stores in the year to fuel potential further growth.
Plus, it maintains its long-standing relationship with Nike, with the firm becoming the first European partner to go live on the Nike Connected Partnership in 2022. This programme gives JD customers member-exclusive offers from the global sportswear giant.
Importantly, this partnership gives it a competitive edge over many rivals as it offers the latest and most desirable line of trainers.
The long-term view
Another reason I was channelling my inner Warren Buffett by sifting through old annual reports was that I wanted to read management’s view on the bleak economy back then.
The 2010 report said: “We recognise the increasing challenges of strong comparatives and the current economic…threats to consumers’ expenditure“.
The 2024 trading update mentioned “very tough comparisons with last year” and “more cautious consumer spending“.
This reminds me that tough economic periods do come and go. So I suspect this may prove to be a speedbump in an otherwise upwards trajectory for the business.
That’s not to say the stock couldn’t dip lower in the near term as brokers crunch the numbers and revise their targets. That’s a risk.
But the stock looks cheap and screaming to be bought, in my view. As such, I’d add it to my ISA with any spare cash to invest.
