Image source: Britvic (copyright Evan Doherty)
If I didn’t know anything about JD Sports (LSE: JD) shares, I would have thought they’d enjoyed a blinding few years.
The athleisure trend seems to go from strength to strength. People these days wear trainers, leggings, football jerseys and all manner of sports-based clothing that JD is known for. This once-youth-only attire seems to have resulted in it becoming perfectly normal to wear jogging bottoms to the office and socialising. The £5bn sports goods seller must be reaping the rewards, mustn’t it?
Well, I do know a couple of things about JD Shares and rather than being a terrific buy, the stock has been floundering, falling all the way to a share price that can be counted in pennies.
Gold rush
While this jump in sportswear popularity did spark a surge in the JD Sports share price, the gold rush came to halt a few years ago.
It was affected by various issues from the pandemic hangover to supply chain issues, the cost-of-living crisis, rising costs, and problems at one of the key brands it sells (Nike). The recent turbulent economy has meant rising revenues stalled and earnings (while still high) weren’t what investors expected. The net result has been something of a collapse for the stock, down 58% in value from its peak.
A £10,000 stake bought in November 2021 would now be worth £4,140. I can count the number of FTSE 100 stocks that fell by more over the same timeframe on the fingers of one hand.
Too cheap?
As with any stock that has fallen so far, there are the makings of an opportunity in the current JD Sports share price. At least, the valuation suggests so. The Bury-based firm trades at nine times earnings and given that earnings are forecast to rise in the years ahead, that figure will drop down to seven times earnings by 2027.
A single-digit price-to-earnings ratio is more the realm of tobacco or energy stocks. You know, companies that sell products like oil or cigarettes that are (in theory) on their way out. A valuation that’s nearly half that of the FTSE 100 average is not what I’d expect from such a firm.
Or is it?
One of the dangers in buying the shares in fashion-linked companies is that trends change. Superdry was a terrific stock until the winds of change arrived and it dropped 99%. What if the athleisure trend runs out of steam?
On a related note, what if people simply can’t afford to buy branded sportswear as much? The Nike share price has been dragging lately too, a big problem for JD Sports which relies on the American brand for around half its sales.
The uncertainty is what puts me off from buying the shares myself, but even so, I wouldn’t be surprised for it to be a bargain at this price and go on to be the turnaround of the decade. So it may be worth considering for those prepared to embrace the risk.
