Is JD Sports a buy after 23% plunge?
29th June 2017 13:43
How the fortunes of a company can change in just 11 weeks. In April, tracksuits-to-trainers retailer was popping the champagne corks, celebrating a record high share price after full-year results smashed expectations.
By the end of May, it made another all-time high, but then trouble hit. Having already fallen 13% in just a month, an AGM trading statement had the shares down as much as 12% Thursday to a three-month low at 350p.
Of course, JD's been hit by negative sentiment that's affected the wider retail sector following weak industry sales data. It's not been helped by rumours of a possible link-up between American giants and , either.
But it's JD's close relationships with blue-chip brands that attracts many investors to the stock, and management has suggested it does not expect Nike to sell its premium/exclusive products on Amazon's platform.
Today's update was certainly not as bullish as we've become used to, but like-for-like sales comparisons will not be "truly meaningful" until "a further period of year-on-year calendar differences" unwind by the end of the first half.
JD's clearance sale was brought forward by a week due to the timing of Eid, while June 2017 had to compete with a strong performance during 2016's European Championships football tournament.
There's also been some margin pressure, but executive chairman Peter Cowgill told shareholders JD is on track to deliver full-year results in line with market expectations.
A net 28 stores were added to the high street empire in the period to 24 June, including its first two in Australia. JD's growing international footprint should also help offset any weakness at home.
"We also believe that our highly differentiated multibrand offer, combined with an attractive and dynamic presentation instore and online, gives the group continuing competitive advantage," said Cowgill.
Forecast-busting updates seen in recent years will not continue indefinitely and, as Peel Hunt notes, expectations may finally be catching up with reality. That was bound to happen, though, and it takes nothing away from the firm's "exciting growth profile".
A forecast calendar year 2018 price/earnings (PE) ratio of around 15.8 times looks modest for predicted double-digit earnings growth for the foreseeable future.
While Investec's target price ticks up 5p to 455p and Barclays sticks with 475p, others in the City are more bullish. Both Peel Hunt and Cantor Fitzgerald look for a fiver.
Cantor's Mark Photiades believes the valuation "still does not reflect the true value of the JD concept, which is trading in a booming segment of the retail market".
"The JD format has a great track record growing operating profits by 44% compound annual growth rate over the last three years, is clearly differentiated from its closest UK competitor, has the support of the leading brands in sports fashion and has significant potential to be developed overseas, where it has clear momentum," he adds.
JD's been a star performer in Interactive Investor's annual Winter Portfolios for a couple of years, returning 29% and 46% in 2015/16 and 2016/17 respectively.
Ahead of JD's usual winter rally, look out for interims early September for any further hint that selling is overdone.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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