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It's been a difficult week for JD Sports (LSE: JD). After issuing a profit warning just two months ago, it issued another this week.
Unsurprisingly (and perhaps rightly so), the stock market didn't like this and slashed the stock. It has fallen 45% since September.
Although the company continues to expect large profits for the current fiscal year, the changes in expectations do not instill confidence in its management.
That said, the chief executive dipped into his own pocket this week to the tune of £99,000 buying shares in the company after they plummeted following the profit warning.
I also increased my existing shareholding after the profit warning. This is because I believe the sports retailer's share should be able to recover from this latest setback. Yes, it may take some time, but I am a long-term investor.
What has been going wrong?
The company's announcement had a tone that was too self-congratulatory for my taste, something I typically find raises questions about whether management is really understanding the issues facing a company. But it also contained some concrete facts.
In summary, JD said the market had been tougher than expected and he expects those tough trading conditions to continue. Comparable revenue fell year-on-year in November, but December showed growth.
Although the range of expected profits before tax and adjustment items has been reduced, it is still between £915m and £935m. Faced with that, the FTSE 100 The company's £4.6bn market capitalization seems very low to me.
Here is a big concern I have.
However, there are clearly risks. One thing in particular caught my attention in the company's statement. He said the market has been more promotional than he anticipated and that he decided not to participate in it, which, in simple terms, means that he did not lower prices just to match competitors.
I think it is a credible business strategy. But I am surprised that JD, with its enormous presence, had not generally anticipated how promotional its market would be in the period analyzed.
I'm also concerned about what is driving such promotional activity by rivals. Is this a glut of unsold inventory or a response to weaker consumer spending?
Either explanation could spell trouble for JD in the coming months, as both suggest there may be a growing mismatch between supply and demand in the broader market.
JD still has a proven formula
If that happens, it could lead to another profit warning from JD in due time, and I think there are only so many profit warnings management can issue before its credibility suffers.
But although I have growing doubts about its current management, the business itself seems solid to me.
The brand is well established and benefits from a global presence that gives it economies of scale. It has a proven formula and, even if profits fall, they are still on track to be substantial.
There is certainly a risk here, but for the quality of trading that JD has demonstrated, I think the share price seems too low. That's why I've been buying more of what I consider a bargain in the FTSE 100 while I can.
