After slumping 50% in five years, the JD Sports Fashion (LSE:JD) share price now trades for under a pound. Just 88p, in fact, down from 233p towards the end of 2021.
It mirrors the fall of Diageo, another FTSE 100 stock that peaked in late 2021. That was the twilight of the near-0% interest rate era, a time when inflation was under control.
From their peaks, both Diageo and JD have cratered 62%.
What’s up with JD?
Another consumer stock that has fallen off a cliff is Nike. Since November 2021, it has crashed roughly 76%. And that connects to JD’s price fall as Nike is a key JD supplier.
The common theme, of course, is squeezed consumer spending. With the cost of living so much higher than it was in 2021, more cash-strapped consumers are seeking bargains rather than high-priced trainers. This has cast doubt on JD’s traditional premium pricing strategy.
Youth unemployment is also a problem. Between March and May, there were 112,000 more young people unemployed in the UK than the year before. Their unemployment rate was 16.4%, up from 14.2%.
Government policy hasn’t helped, business groups say, but youth unemployment is also a problem in the US, China, and parts of Europe. Globally, AI is sadly automating entry-level jobs that young people have traditionally relied on to get their careers started.
So, a £150 pair of Nike trainers has gone from wardrobe staple to wallet breaker. And footwear makes up 60% of JD’s sales.
Bleak full-year outlook
With its core customer base under pressure and Nike still its biggest-selling brand, JD is struggling to grow like-for-like (LFL) sales.
Last year, they declined 2.1%, despite total revenue increasing 10.5% to £12.7bn due to the acquisitions of Hibbett (in the US) and Courir (France). The weak trends continued into Q1 with LFL sales down 2.3%.
For the full year, management is guiding for profit before tax and adjusting items of £750m–£850m — a wide range that reflects ongoing macroeconomic uncertainty. Last year, that figure was £852m.
Therefore, profits are expected to remain under pressure, which doesn’t bode well for the share price in the near term.
What’s the latest price target?
That said, City analysts rate the stock as either a Buy or Hold right now. None reckon it’s worth selling while it’s trading so cheaply (just 10.4 times earnings today).
Their average price target is 104p, up 17%. This suggests a £5,000 investment could turn into almost £6,000 by next July, if brokers are correct (which often they aren’t).
I’m not looking to buy JD shares, especially with the Iran war expected to cause more inflationary pressure over the next few months. The backdrop doesn’t look like it’s going to improve any time soon.
Also, while JD bumped up the dividend by 20% last year, the yield is just 1.35%. There are other potential recovery stocks in a similar situation that are offering far higher dividend yields (Diageo, Nike and Greggs, to name three).
Longer term, this cheap stock could recover strongly were sales growth to resume. But that would depend on improvement in the cost of living and youth unemployment, things that unfortunately look quite entrenched for the time being.
Given that JD could be dead money for a while longer yet, I see better opportunities to consider elsewhere.
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Ben McPoland owns shares in Diageo.
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