Are shares in JD Sports 62% undervalued?

Shares of FTSE 100 retailer JD Sports (LSE:JD) certainly look good value. Down 20% since the start of the year, the stock trades at a price-to-earnings (P/E) ratio of around 12.

That puts it 62% below the top analyst estimate for the stock. And while that might be optimistic, investors might reasonably take a closer look at the stock from a value perspective.

Why the stock’s been falling (1)

There are – in my view – two main reasons why the stock‘s been falling. The first is that sales growth has been weak. 

In its January update, the firm announced sales growth of 3.4% for last year. That’s barely above inflation and the worse news is that this was entirely the result of opening new stores.

Like-for-like (LFL) sales were actually down 1.5% in 2024. That’s a trend we’ve seen elsewhere (Greggs, Associated British Foods, and B&M European Value Retail), but it’s also a problem.

The company won’t be able to keep opening new stores to offset this indefinitely, so LFL growth‘s important. And the guidance for this year is for LFL sales to be flat, not up. 

Why the stock’s been falling (2)

The latest reason the stock’s been falling has to do with Nike. The company might have one of the most recognisable brands anywhere, but it’s been struggling. A series of mistakes have caused sales to fall. And the latest news from the US firm is that revenues are down 9% in the most recent quarter. And the outlook for the next one’s also weak.

That’s a problem for JD Sports because – to put it simply – if Nike can’t sell its trainers, it’s hard to see how the FTSE 100 company will. And that’s another bad sign for sales.

It’s hard to assess the extent of the issue (JD Sports doesn’t disclose information about Nike sales because it’s another public company). But it’s clearly not a good thing. 

Is the stock actually cheap?

The investment bank with the 200p JD price target is Peel Hunt. The estimate is from January, so it doesn’t account for the latest news from Nike. 

According to the broker, JD Sports is in a good position. It’s hard to see an immediate increase in profits, but it’s expected to do well over the long term.

In particular, the report highlighted the fact the FTSE 100 retailer hasn’t been cutting prices to boost sales. Instead, it’s focused on margins – and it’s done well on this front. 

I suspect more short-term issues (this time coming from Nike) are unlikely to matter much to a broker focused on the long term. So should I buy the stock while it’s down 20% this year?

Retail investing

I agree that JD Sports has been facing problems that aren’t of its own making. But that makes me feel worse about the stock, not better. 

In general, I prefer companies that are in a position to control their own destiny. The more a business can do to increase its profitability, the better I like it. 

There are a few (very important) exceptions but this isn’t usually the case with retailers. And I don’t see that it’s true of JD Sports, which is why I’m going to look elsewhere for stocks to buy.

This post was originally published on Motley Fool