New portfolio buy: JD Sports Fashion shares
This retailer looks well placed to benefit from the growth of the athletic footwear and athleisure markets
A couple of years ago, I bought shares in Nike (NYSE:NKE) for my portfolio. I wanted exposure to the booming athletic footwear and athleisure markets, and I figured that Nike – with its powerful brand and brilliant growth track record – was the best way to play the theme.
It’s fair to say that this trade didn’t go as planned. Recently, Nike has made a number of major missteps including trying to go direct to consumer (DTC) and increasing its footwear prices too quickly and as a result growth has stalled as other brands such as Hoka and On have captured market share.
Last month, I finally bit the bullet and dumped my Nike shares after they rallied up to around $90 (I took a loss of about 25%). However, I wanted to retain some exposure to the athletic footwear and athleisure markets so I redeployed the capital into FTSE 100 stock JD Sports Fashion (LON:JD).
Why I’m bullish on JD Sports Fashion
From an investment perspective, JD Sports Fashion has several things going for it right now, in my view.
For starters, it sells multiple brands including Nike, Adidas, New Balance, Hoka, and On. So, it gives me exposure to the brands that are currently stealing market share from Nike.
Secondly, the company – which has around 4,500 stores globally – is expanding rapidly. This financial year, it expects to open around 200 new stores across the world. It’s worth noting here that in recent years, JD has acquired some major sportswear chains in the US including Finish Line and Hibbett. After the acquisition of Hibbett, the US now represents around 40% of revenues.
I’ll point out that in this industry, store presence is crucial. Ultimately, consumers in these markets want to visit stores with their friends to check out and try on new products – it’s all part of the buying experience. Nike got this hugely wrong when it tried to go DTC. One thing JD has going for it here is that its stores are usually quite slick and modern. This could potentially give it an edge in the US. In a recent trading update, CEO Regis Schultz noted that in the US, many retailers have invested online recently but haven’t invested in their physical stores. “We have an unfair competitive advantage. We come with new space, new merchandising, a much more modern way of looking at it, and that's what is winning,” he said when asked about the group’s operations in the US.
“I am confident that the global sportswear market, and in particular the athleisure space within it, has years of structural growth ahead of it with favourable trends like casualisation and active lifestyles continuing. Euromonitor is forecasting that the sportswear market will achieve value growth of 6.6% per year from 2023 to 2028, on average. This would take the total value of the market from $396 billion in 2023 to $544 billion in 2028 and within this timeframe, we have targeted reaching double-digit market shares in our key markets.”
JD Sports Fashion CEO Regis Schultz
Finally, the valuation looks attractive. For the year ending 31 January 2025, analysts expect JD to generate earnings per share of 13.1p. At today’s share price of 139p, the P/E ratio here is only 10.6. At that multiple, I see room for a significant valuation rerating at some stage in the future.
5-year average revenue growth: 17%
5-year average return on capital employed: 13.4%
P/E ratio: 10.6
Dividend yield: 0.7%
Market cap: £7.2 billion
A volatile stock
Now, I’ve kept my position quite small as I expect the stock to be volatile. I’ve owned it in the past and done well from it, but it does tend to swing around wildly at times. According to Stockopedia, the beta here is 2.2, which means that the stock is about 2.2 times as volatile as the broader UK market.
I believe that it can do well for me in the years ahead though. Assuming that consumer spending does not fall off a cliff, I expect the athletic footwear and athleisure markets to continue growing at a healthy pace. As these markets grow, this company should grow too.
Edward Sheldon owns shares in JD Sports Fashion. The information in this article is for general informational purposes only and should not be considered financial advice. Please consult a qualified financial professional before making any investment decisions.