JD Sports’ share price trades at only 6.8 times forecast earnings. What on earth’s going on?

The JD Sports Fashion (LSE:JD.) share price tumbled on 20 November after investors reacted to the group’s third quarter trading update. Let’s examine what’s going on.

Overall, the sports and leisure retail giant reported a 1.7% drop in like-for-like (LFL) sales during the 13 weeks to 1 November (Q3) compared to the previous quarter. The UK was the worst performing market with a 3.3% fall. Looking at the year-to-date (YTD) position (39 weeks), the reduction in the group’s LFL sales was 2.2% versus the same period a year ago.

However, Q3 organic revenue was up 2.4%. On a YTD basis, it was 2.5% better. This measure excludes the impact of acquisitions and disposals. It comprises LFL sales as well as revenue from net new space and store conversions.

Finally, there’s total sales to consider. This includes the group’s acquisitions – Hibbett (July 2024) and Courir (November 2024). Here, Q3 revenue was 8.1% higher and 15.7% better for the nine-month period.

The bottom line

With so many revenue figures to consider, it’s sometimes difficult to understand how the business is performing. However, in the world of finance, it’s often said that turnover’s for vanity and profit’s for sanity.

In terms of earnings, JD Sports says it’s “mindful of incrementally weaker macro and consumer indicators in recent weeks” and is therefore taking a “pragmatic approach” to its full-year outlook. In other words, it now expects its FY26 profit before tax and adjusting items to be “within the lower end of current market expectations”.

No wonder investors reacted as they did.

Even so, the stock still look cheap to me. Earnings per share for FY26 could be as low as 11.5p. But this means the stock’s currently valued at just 6.8 times forecast earnings. For FY28, this drops to 5.3.

Before the trading update, the consensus 12-month share price target of analysts was 110p. This is 41% higher than yesterday’s closing price.

Challenging times

But for the company to achieve a higher valuation, I reckon it will need to demonstrate that it’s able to improve all of its performance measures.

And like most retailers, the group’s just entered the most critical trading period of the year. However, it remains cautious: “We are particularly mindful of the pressures on our core customer demographic [younger people], including rising unemployment levels, as well as near-term volatility around consumer sentiment”.

Increasing unemployment among the group’s target customers might not be a temporary phenomenon. Lots of entry-level jobs — many of which are performed by the under-25s — could be under threat from the rise of artificial intelligence.

Looking ahead

But the group remains optimistic about its medium-term potential, which it claims “is well reflected in our commitment to enhanced shareholder returns”. However, although its dividend has tripled since the pandemic, the stock’s only yielding 1.3%. Fans of share buybacks might be consoled by the £200m programme that’s currently underway.

JD Sports isn’t going gangbusters at the moment. But I don’t find this surprising given the gloomy economic outlook, particularly in the UK. However, I believe the stock offers excellent value at the moment and — with its strong balance sheet — could be one for long-term investors to consider. Next summer’s World Cup in North America should also give the group a boost.

The post JD Sports’ share price trades at only 6.8 times forecast earnings. What on earth’s going on? appeared first on The Motley Fool UK.

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James Beard has positions in JD Sports Fashion. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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