JD Sports Fashion might be undervalued at the moment. Let’s break down the situation and potential risks, alongside why it might be an attractive opportunity for long-term investors.
Valuation and Potential Upside
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Attractive Valuation: The forward P/E ratio of 7.4 is quite low, especially for a FTSE 100 company. The fact that this is a significant drop from the 18.1 P/E ratio it traded at in November 2021, combined with the stock being undervalued by 73% (based on a fair multiple of 12.8), makes it an intriguing opportunity if you believe the company will bounce back and grow. This valuation suggests that much of the negative sentiment is already priced in, leaving room for potential upside if JD Sports can meet its targets and overcome current challenges.
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Strong Global Growth Potential: The global sportswear market is projected to grow by 6.6% annually over the next seven years, and JD Sports has a strong position in this market, especially with its increasing presence in North America, Western Europe, and North West Africa. The fact that sportswear is becoming a first-choice purchase for younger demographics (16 to 24-year-olds) provides JD Sports with a solid growth runway as consumer preferences shift towards more casual, active lifestyles.
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Acquisitions and Expansion: The company’s recent acquisitions, which have expanded its store footprint significantly, are likely to contribute to future revenue growth. The addition of new stores in America and other regions should help JD Sports diversify its revenue base and tap into markets with high growth potential. Expansion into new regions often leads to a bump in market share, especially in fast-growing sectors like sports fashion.
Challenges and Risks
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Dependence on Nike: One of the key risks you pointed out is JD Sports’ heavy reliance on Nike. While JD Sports is the number one global partner for Nike, the American brand is facing its own challenges. Nike has been trying to reduce its reliance on third-party retailers, including JD Sports, by selling directly to consumers. If Nike’s struggles persist and JD Sports’ relationship with them weakens, this could significantly impact its future sales and profitability. The stock price correlation between the two companies is concerning, and any prolonged issues at Nike could spill over into JD Sports’ performance.
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Nike’s Struggles: As you mentioned, Nike’s sales and earnings have been under pressure due to its struggle with product innovation and reliance on legacy brands. However, despite these setbacks, Nike remains the biggest sportswear company globally, and signs of a recovery among runners suggest that it could bounce back. If Nike can regain momentum, it would benefit JD Sports as well, given their close partnership. But this is still a risk to watch.
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Dividend Concerns: The fact that JD Sports has a meagre dividend yield of less than 1% is another issue. This low payout can make the stock less attractive to income-seeking investors, and if earnings growth slows down further, shareholders may feel less inclined to hold the stock. A slowdown in earnings combined with a lack of dividend support could make the stock more vulnerable to negative news or broader market downturns.
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Volatile Trading Environment: The trading update in November, which warned of a potentially lower-than-expected full-year profit, highlighted the volatile nature of the retail market. The fact that JD Sports saw a 10.7% drop in its share price on that news shows just how sensitive the stock is to sentiment. If the company misses expectations or continues to face market volatility, further declines in its share price could be possible.
Long-Term Opportunity or Risk?
In the short term, there are several factors at play that could either drive JD Sports’ recovery or exacerbate its decline. If Nike’s issues persist or the broader retail environment remains volatile, JD Sports may continue to face pressure, especially given the lack of a strong dividend to support its valuation. On the other hand, if the company can capitalize on the global sportswear boom, execute well on its expansion plans, and manage its relationship with Nike effectively, the current valuation could turn out to be a great long-term buying opportunity.
For investors like you who are bullish on the company’s growth prospects, holding onto the stock could make sense, especially given its low valuation relative to its potential. However, risks remain, and a watchful eye on Nike’s performance and any further negative trading updates will be key to assessing the risk going forward.
Would You Be Comfortable Holding JD Sports?
Given that JD Sports’ stock is significantly down from its highs, and you’re still optimistic about its future growth potential in global markets, holding your position could be a strategic move—especially if you’re thinking long-term. The market seems to have priced in a lot of uncertainty, and there might be upside if the company can prove its growth story.
However, would you consider buying more if the stock experiences further weakness, or do you feel like you’ve already committed enough to the company at this stage?
