Down 20%, should I act on the JD Sports share price?

I have been quite enthusiastic about the prospects for sports retailer JD Sports (LSE: JD), buying it last year for my portfolio. But lately other investors seem cooler on the company. The JD Sports share price has fallen over 20% this year and is up only 1% over the past 12 months.

What is behind the fall – and what should I do about it?

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Strong performance

Last month the company issued a trading update. It said that revenues for the past five months or so were up 10% compared to the same period in the prior year. The company also maintained its gross profit margins, despite supply chain disruptions.

In fact, not only did the company say performance was strong, it actually upgraded headline pre-tax profit forecasts for the full year. The market was expecting around £810m and JD said it should surpass that number. Currently the company’s market capitalisation is £9bn. So the JD Sports share price implies a price-to-earnings ratio of around 11. I regard that as a bargain for a company with its proven growth potential.

Lingering concerns

Despite the strong performance, investors have a few concerns about JD Sports right now. Stimulus spending in the US has been a boon for sportswear retailers like this. But with stimulus being wound down, that will not be the case in future. That could hurt revenues. Meanwhile, supply chain inflation risks eating into profit margins.

The company was recently fined by the UK competition authorities in connection with its Footasylum takeover bid, although JD has vigorously defended its actions and criticised the authority’s “use of inflammatory language”. In the long term I see the fine as a storm in a teacup. JD’s ambitious empire-building has ruffled some feathers — but I think it could be good for continued growth prospects at the retailer.

Investor confidence was shaken last month when the company’s chief executive sold just over half his JD shares for around £21m. However, directors sell shares for a variety of reasons. In itself I do not see a share sale as problematic for the company’s investment case. The chief executive continues to own 9.7m shares in the company.

My next move on the JD Sports share price

I keep scratching my head to see if there is something I am missing here. On the one hand, the company’s business performance is going from strength to strength. It has upgraded already high profit forecasts and has a proven formula for success.

But on the other hand, the share price has been sliding notably. I do not see any compelling reason for that. Based on its successful business model and earnings outlook, I continue to see reasons for optimism about the company. To me, after the share price fall, the JD Sports valuation simply looks more attractive than before. So I see the recent fall in the JD Sports share price as a buying opportunity for my portfolio.

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Christopher Ruane owns shares in JD Sports. 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.

This post was originally published on Motley Fool

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