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Thank you. The feeling in the early part of the week was that the Feds words were going to be positive without a rate cut so it surprised me that there’s a bit of a retreat. Like you say, not significant compared to where this has been lately 🤞
Stores in each of the next five years in underpenetrated markets, which could significantly boost earnings.
The growth potential is perhaps being overshadowed by two key fears: that expanding in the United States, where trainers sell more, will weigh on margins; and that one day the big brands JD Sports sells will decide to cut out the middleman.
Sudden shocks can cause investors to start fearing the worst and worry too much. In this case, some of their anxieties appear to be unwarranted. Sales of trainers generally are less cyclical than those of apparel and, when accounting for how many more of them can be packed into stores, are arguably just as profitable. Likewise, JD’s partnerships don’t appear to be under immediate threat. This business model has been beneficial to all parties for years, partly because the biggest buyers of sports fashion don’t want to dress head-to-toe in only one brand.
JD Sports perhaps no longer deserves to be valued as a quality growth stock. But it shouldn’t be considered a dog, either.
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The recent profit warning from JD Sports Fashion was especially painful. It raised questions about the relatively new management team’s ability to see challenges coming and suggested that the group was more vulnerable to economic turmoil than the market had believed. Being heavily dependent on Christmas and on weather conditions and being susceptible to competitors’ discounting were supposed to be other retailers’ problems.
This month’s wake-up call has left investors fearing the worst and adjusting their expectations. It’s tempting to view sell-offs induced by profit warnings as an attractive time to buy, but often they are not. When companies start delivering bad news, it’s usually followed by more of the same.
The present economic environment dispels hope of a quick turnaround. Many of the issues that forced JD Sports to downgrade its profit expectations aren’t going away any time soon. Interest rates are higher than normal and have been for a while. The longer this goes on, the more it weighs on disposable incomes, meaning that demand for the retailer’s expensive and arguably non-essential clothing and trainers could fall further.
When JD next updates the market, this tricky situation, compounded by the group’s high and increasing fixed-cost base, is likely to come up in conversation. Its bosses, after missing guidance, are now under serious pressure to not underestimate its challenges again.
Another valid concern is competition. For years, JD Sports was able to differentiate itself and to charge more than other shops because it stocks exclusives from popular sports brands such as Nike, Adidas and The North Face. Trading in the 22 weeks to December 30 made investors question the strength of that premium status. In that period, the retailer was forced to engage in price wars with other stores in the United States and Europe, the two regions in which it is expanding, in an effort to grow its market share and it missed out on sales because it refused to do the same in Britain.
All this understandably has weighed on sentiment. Over the past decade, investors valued the shares at just over 17 times forecast earnings. Today, they trade at only nine times.
A discount is warranted, given the unfavourable economic environment and question marks about JD’s quality credentials. However, a drop of nearly 50 per cent seems a bit excessive. The present rating prices-in a lot of bad news. It also seems to overlook the fact that the sports footwear and apparel specialist could receive a boost from this year’s Olympic Games and Euros football tournament, better exclusive product launches and easing inflation and that it is still a fundamentally good company.
JD Sports has an excellent track record and the potential to continue profiting from casual dressing and exercise becoming more popular. Organic sales keep growing, even during downturns, the group is swimming in cash and it plans to open at least 200 new JD stores in each
Thanks FF. I missed that run up as was too nervous about a rug pulls. Have put some into Fisker though.
JD had a good start today, but has been slapped down really strongly. Some articles are suggesting 118.75 could be resistance?
FF. please could you post a link to the account as it certainly sounds interesting? Also, thanks for mentioning PHUN, I managed to get a return just under 30% on it myself this evening too.
Still sounds like a positive outlook on inflation?
Higher tobacco duty and more expensive theatre tickets contributed to a tick up in inflation in December.
But the rate still more than halved over 2023 and has undershot the Bank of England’s expectations.
Where next? At the very start of 2024, economists think that decline may have stalled further due to what was happening a year previously.
Beyond that, some analysts reckon, the same factors that triggered the initial spike - energy and food costs – may allow it to decline rapidly to dip below the Bank of England 2% target during the spring.
That could mean inflation in the UK undercuts the US and the eurozone for the first time in two years.
Whether it stays low depends on what happens to other prices, largely those non-essentials. Core inflation remains relatively high but is easing. So some economists predict rates could fall by June, and drop several times this year