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JD Sports: Could results show the stock is an undervalued buy?

By David Burrows

10:34, 16 September 2022

JD Sports store in the UK. Photo: Shutterstock
JD Sports has faced fines from the CMA this year. Photo:Shutterstock

JD Sports (JD.)  provides its half-year results next Thursday. It has not been an easy year for the retailer and shares are down 42% year to date.

Yet brokers still seem to like the company. It's a retail play with a strong balance sheet and a certain resilience against recession - and given the share price fall, it could be seen as a stock to be snapped up on the cheap.

Richard Penny manager of the TM CRUX UK Special Situations fund recently added JD Sports to his portfolio after its share price fell from about 250p at the beginning of the year to a low of 105p, this on the back of increased profit forecasts in JD Sports' last quarterly update.

The stock currently sits at around the 126p level – still a long way from its year peak.

JD Sports share price chart

Whilst Penny acknowledged an inevitable slowdown in trading later this year, with JD’s strong balance sheet and a good split between Europe, the UK and the US, he saw an opportunity to initiate a new position, seeing the downturn as a "good chance to buy a long-term winner".

The leisure wear retailer's woes this year have been well documented and go a long way to explaining the plunging share price.

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JD Sports' annus horribilis

As Russ Mould, financial director at AJ Bell points out, the firm has twice fallen short of the regulator, sold an acquisition for a thumping loss and seen the departure of Peter Cowgill, in many ways the driving force behind the company, as well as its executive chairman and chief executive.

The brushes with the Competition and Markets Authority (CMA) have cost £6.3m in fines, relating to allegations of price fixing on Rangers Football Club kit and the purchase of Footasylum in 2019 in defiance of an interim order from the regulator.

Matters only got worse when the CMA then blocked the Footasylum deal and forced JD Sports to sell. It did so for £37.5m to German private equity firm Aurelius, a 60% loss on the £90m purchase price.

That was all too much for the board which announced a corporate governance review in May, the first steps of which were a move to separate the roles of chair and CEO and Cowgill’s immediate departure.

Mould is hopeful that the appointment of Kath Smith as interim boss and then Régis Schultz to the role on a permanent basis from this month will steady the ship, while Andy Higginson arrived as chair on 11 July.

HK50

16,616.00 Price
+0.860% 1D Chg, %
Long position overnight fee -0.0233%
Short position overnight fee 0.0014%
Overnight fee time 21:00 (UTC)
Spread 5.0

DE40

18,494.80 Price
-0.220% 1D Chg, %
Long position overnight fee -0.0221%
Short position overnight fee -0.0001%
Overnight fee time 21:00 (UTC)
Spread 1.5

US100

18,278.40 Price
-0.090% 1D Chg, %
Long position overnight fee -0.0262%
Short position overnight fee 0.0040%
Overnight fee time 21:00 (UTC)
Spread 1.8

US30

39,745.60 Price
-0.060% 1D Chg, %
Long position overnight fee -0.0262%
Short position overnight fee 0.0040%
Overnight fee time 21:00 (UTC)
Spread 2.2

What JD results might show

City watchers will be keen to see what numbers JD reveals on Thursday and whether there is reason to be positive on the stock.

“Investors continue to fret about the cost-of-living crisis, how it may affect sales of trainers and athleisure wear and therefore impact JD Sports’ business, although there is little sign of JD taking a hit, at least so far,” Mould says.

As evidence he points to July’s trading statement which flagged: 5% sales growth on a like-for-like basis in the first five months of the year.

On a stated basis, analysts are looking for 7% sales growth to £9.2bn in the year to January 2023.

Management had expected to at least match last year’s record adjusted pre-tax profit performance of £947m in the year to January 2023 - analysts are looking for £956m.

Mould explains that JD’s board does expect a return to more ‘normal’ seasonal earnings patterns this year, whereby JD makes 35% to 40% of profits in the first half and the rest in the second, thanks to the boost from both ‘back to school’ and Christmas.

That implies first-half adjusted pre-tax income will be around £355m, compared to £440m in the six months to July 2021.

If JD does match last year’s profits, then to put in context, adjusted pre-tax earnings would be more than double the pre-pandemic peak of £439m.

Marketbeat reinforces Penny’s positive position on JD, the consensus rating from 10 brokers is to recommend JD as a ‘moderate buy’.

This is broken down into eight ‘buy’ ratings and two ‘hold’ ratings. The consensus price target is 496.25p.

Markets in this article

JD.
JD Sports Fashion
1.358 USD
0.173 +15.100%

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