The JD Sports (LSE: JD) share price has fallen by 10% over the past month. Does this represent a great buying opportunity for me, or is it a sign of something more serious?
The recent share price fall is the continuation of a longer-term decline. Since the start of January, the company’s shares have more than halved in value.
This isn’t surprising given that JD Sports is vulnerable to an economic slowdown, particularly in the UK and Ireland, where it generates over 40% of its sales.
But JD is the UK’s largest sports fashion retailer and is something of a success story. It has grown rapidly in recent years. Sales were £3.2bn in 2018 and are likely to exceed £9bn in 2022. This growth helped the share price treble between January 2019 and December 2021.
Like the trainers it sells, the company has moved with the times. Although it has 3,400 stores, over 40% of its sales are generated online.
Board changes
Earlier this month, investors reacted badly to the news that CFO Neil Greenhalgh was to stand down in 2023.
Despite the promise of a “smooth transition to a new CFO“, and the board insisting it was business as usual, the company’s shares immediately plummeted in value, and closed over 9% down.
To me, wiping nearly £500m off the value of JD Sports seems to be an over-reaction. Greenhalgh will help pick his successor (and should be in the mix for any future FTSE 100 CFO vacancy that might arise).
However, board changes make investors nervous, and his departure follows that of Peter Cowgill, who stood down in May as Executive Chairman.
What about the financials?
Last month, the company released its results for the 26 weeks to 30 July. These revealed a £532m increase in revenue to £4.4bn, but a £64m fall in operating profit to £333m.
Encouragingly, the gross profit margin was unchanged at 48.5%. This shows that, despite rampant inflation across its supply chain, JD Sports is able to pass on rising costs to its customers.
However, selling and distribution expenses were 14% higher, and administrative expenses were up 11%, when compared to the same period in 2021.
Should I invest?
So where does that leave me? There are a number of concerns I have about investing.
Future expansion is going to be difficult. The company was recently ordered by the Competition and Markets Authority to sell Footasylum, which operates 63 UK stores, on competition grounds (that it — and some analysts — disagreed with).
According to a report on news site Fashionnetwork.com, the average teenager owns six pairs of trainers. With younger people more likely to be affected by the cost-of-living crisis, will they want to buy more?
Also, JD Sport’s dividend yield is paltry. Last year the company paid 0.35p per share which, if repeated this year, implies a yield of less than half a percent. This is unlikely to change soon, with the board intending to restrain dividend growth to help fund “ongoing growth opportunities“.
Finally, as for most retailers, a successful Christmas is going to be vital for JD Sports. With gathering economic headwinds, I fear retailers are heading for a bleak winter.
I’m therefore not going to invest. Instead, I’ll wait until the New Year before reviewing the situation again.