Image source: Britvic (copyright Evan Doherty)
In some ways, little has changed lately for JD Sports (LSE: JD). A series of profit warnings over the past several years badly hurt investor confidence and the JD Sports share price – above £2 in 2021 – has fallen as low as 61p over the past 12 months. It is still selling for pennies, although close to the £1 level.
On the other hand, I think things may be changing when it comes to valuing the company.
A trading update over the past week was pretty well received, despite including like-for-like sales declines in three of the company’s four geographic trading regions that together accounted for 96% of the retailer’s sales.
That sounds odd. But I think there may be a good reason for it – and one that could potentially help propel the JD Sports share price sharply higher over the coming year.
Don’t sweat the small stuff! Look at the big vision…
In essence, JD Sports’ management has had a clear, simple, and consistent message over the past couple of years.
It has gone something like this. We are going to add loads new stores through building some and buying rivals. That will require a lot of capital expenditure, eating into our profitability and formerly sizeable cash pile. But it will give us huge scale, driving revenue. We can use that as the basis to grow profits over the longer term, thanks to economies of scale.
And lo, that vision may now be coming to pass.
Yes, first-half revenues declined 2.5% on a like-for-like basis. But all those store openings and acquisitions mean that organic sales growth in the first half was 2.6%.
That may sound like small beer, but consider this.
First half sales revenues came in at £5.9bn. Five years ago, they were well less than half of that, at £2.5bn. Over the past five years, meanwhile, the JD Sports share price has fallen 33%.
What about the profits, though?
So far, so good.
What about the cost of all that expansion, though? I think the company is now reaping the rewards, while winding down the expenditure. That should mean a step change in revenues versus five years ago – and hopefully now profits too.
While noting the uncertain potential impact from US tariffs, JD Sports said this it week it expects profit before tax and adjusting items for the full year to be in line with market expectations of £852m–£915m.
Compare that to the company’s market capitalisation of £4.7bn. On that basis, I see the company with its global footprint, large customer base, and proven business model as badly undervalued.
I think what has been holding the JD Sports share price back is scepticism that the large expenditure of recent years was worth it, along with doubts about management’s ability to deliver following multiple profit warnings.
The latest update could help to provide reassurance on both points. That potentially sets the scene for investors to reassess the long-term growth story and share price.
I plan to hang onto my JD Sports shares for now.
