Stockwatch: has this FTSE 100 share reached a ‘buy’ zone?

It is interesting to consider JD Sports Fashion (LSE:JD.), with the FTSE 100 shares back to prices not seen since June ahead of a third-quarter trading update on Thursday 20 November.

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At 77p, the shares are down to levels previously traded in 2017 that were followed by highs around 175p early in 2020. Shares then rallied to 235p in 2021. The forward price/earnings (PE) ratio would appear to be around 6x, although this does assume a “normalised” view of earnings.

JD is yet another example of an acquisitive group with a material gap between reported and normalised earnings per share (EPS), as goodwill amortisation and other charges are written back. A difference, however, is modest debt. So, while I question if JD has reached a consolidation phase as a circa £4 billion company, it is not financially overstretched.

Once again, we also see how a “growth”-type business model – re-investing or buying back its shares rather than paying out dividends – falls between stools of neither appealing currently to “growth” investors or “value” investors, who tend to be alert for a material yield. Even down at this price, JD is expected to yield only about 1.4% with around 12x earnings cover.

While I continue to have concerns, as I did when I rated the shares “hold” at 85p last May, it seems JD probably only has to affirm guidance this Thursday for its shares to rise, hence it is worth another dive into beforehand.

The price fell to 63p last April after the US jacked up tariffs, recovering to 106p by early October before drifting back. In a five-year context, however, you could point to a quite similar uptrend in 2024 which failed:

Source: TradingView. Past performance is not a guide to future performance.

JD profits generally second-half weighted

The company has guided for about 60% of adjusted pre-tax profit in its financial year to 1 February, to be generated thus, with the consensus full-year pre-tax profit estimate of £885 million albeit in a range of £852 million to £915 million.

There hasn’t been any director trading in the shares since the CEO bought £99,000 worth of shares last January at 90p. The chair also bought close to £100,000 worth at 95.8p a year ago. Obviously, this was before US tariffs manifested, where JD derives 39% of revenue, and the consumer situation in the UK and Europe (25% and 32% respectively) remains challenging.

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A price/sales ratio of 0.33 with around £13 billion sales projected (and probably feasible after integrating acquisitions) is interesting in terms of margin management, where the 10-year table shows JD having often achieved a respectable 8%.

It also affirms a strongly cash-generative profile (if typical of most retailers), as did last September’s interim results. Such are initial “buy-out” criteria, I wouldn’t be surprised if JD becomes subject to speculation [like that] currently towards FTSE 100 marketing services group WPP (LSE:WPP).

JD Sports Fashion - financial summary
year end 1 Feb

Source: historic company REFS and company accounts.

The February 2025 annual cash flow statement showed nearly £1.6 billion invested for acquisitions and organically, versus £1.2 billion net cash generated. JD only applies around £50 million to dividends.

A £100 million buyback programme was launched last April, which you could say has been a better “return” than dividends if JD shares are trading below intrinsic value. But is that the case?

As ever with acquisitive companies, it gets tricky to discern what could be long-term cash flows discounted to a net present value, especially in fashionable sports merchandise where competition is intense.

Of £3.2 billion net assets as of the 1 August interim balance sheet, 70% constituted intangibles, hence net tangible assets of around 19p per share. I’m not implying that is an intrinsic value benchmark, just that it steers perception on to revenue and margin prospects.

A marketing judgement about JD’s product appeal

We can scrutinise JD’s financials in depth but, as with Burberry Group (LSE:BRBY) in my last piece, a crux issue is whether the group is positioned adeptly with products that appeal to consumers.

Contra “luxury” – where high-status brands may have greater resilience through the consumer spending cycle – JD’s are more attuned to the middle classes. It has a mixed approach to brands, re-selling the likes of Nike, Adidas and New Balance together with its own brands such as Supply & Demand, Pink Soda Sport (womenswear) and Sonneti.

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I concede to not being best placed to judge the “sports fashion” culture, as I purchase genuine athletic gear and have never bought from JD. So, my perception may be compromised for judging prospects. That said, I suspect 99% of people awaiting JD’s update will take their cue from group numbers on Thursday. For what Trustpilot reviews are worth, JD scores 3.8 stars out of 5.

Interim sales driven by Hibbett and Courir acquisitions

Reported group sales for the 26 weeks to 2 August rose 18.0% to over £5.9 billion, but organic sales growth was 2.7% “in what remains a tough trading environment”. This being around the inflation rate, the business could be regarded as flat. Market share gains were achieved in North America and Continental Europe, representing respectively 39% and 32% of revenue. The UK is around 25% and the remainder Asia-Pacific.

The US narrative appears soggy given net new store space growth was 6.6%, yet revenue slipped 2.6% despite increasing 1.3% at constant currency. Like-for-like sales fell 5.2% and a margin slip meant adjusted operating profit fell 36%.

In terms of the potential impact of US tariffs, management said with these results on 24 September: “While we remain cautious on the trading environment for the second half, we expect limited impact from US tariffs this financial year...”

By comparison, Dr. Martens Ordinary Shares (LSE:DOCS) cited US footwear revenue down 11%, similar to a 10% group decline in its financial year to 30 March. When reporting this on 5 June, they also cited wholesale customers “right-sizing” their inventory levels as if not needing stock because it had run high anyway. The “entirety” of spring/summer 2025 and the “majority” of autumn/winter 2025 will either be in the market or in transit – as if having dodged tariffs.

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Regarding JD, it still seems to leave uncertainties over margins in the US, and US tariffs may change anyway. It could be said that a single-figure PE – even if we assume some downgrade – effectively discounts this risk.

Key factors for JD remain around how it is coping with tariffs in the US and higher costs in the UK, which Thursday’s update needs to clarify.   

Minor 0.7% short-selling interest in JD

Citing WPP again for comparison, it is the second most-shorted share on the London market with 8.4% of its share capital out on loan (probably more overall given a 0.5% disclosure threshold and this being an FTSE 100 company). Within a mixed trend of trading, 10 short-sellers are involved and there has been a spike from 1.7% late-August. As WPP’s current price rise shows, such traders are not unknown to pile in late.

JD’s sole disclosed short position above 0.5% is AQR Capital Management, which is short of 0.7% of the issued share capital, which reduced by 0.1% on 7 July.

I differentiate JD from B&M European Value Retail SA (LSE:BME), where a 2.1% disclosed short position exists between three hedge funds. While B&M has boosted revenue with the help of new store openings, JD has made acquisitions and is less risky than B&M given its lower financial debt (albeit lease liabilities also). On a key test: net finance expenses took 20% of JD’s interim operating profit versus 50% of B&M’s.

Take a punt ahead of Thursday’s update?

It really depends on your risk preference. JD shares are down again this morning by 1% in a weaker wider market and, if the general sell-off continues, then near-term speculation may be unwise.

I continue to think that JD is on the verge of “buy” territory and, on a two-year view, it probably offers value. It would, however, depart from analytical discipline to assert so before the update provides details, hence “hold” and look again on Thursday.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.