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When the share price of a leading company FTSE 100 When my company falls off a cliff, my interest levels always rise. It is clearly a dangerous strategy to buy a stock based solely on the fact that it has plummeted. However, I would like to know more about how the business works and then decide if it is a bargain.
Profit Warning
The stock in question is a major athleisure retailer, JD Sports (LSE: JD.). Since just before Christmas, its share price has fallen a whopping 40%. Fueling the decline was a £100m profit cut announced in the New Year.
Management attributed a significant part of this reduction to the unusually mild weather in the autumn, which affected clothing sales in the United Kingdom. However, this fact alone could not explain the drop in its share price.
I think what worries the market the most is that it was taken by surprise in terms of promotional activities.
During the peak trading period in December, it decided not to discount in the UK. Although sales volumes were affected, margins were maintained. However, in the United States the story was different.
Promotional activity across the pond spread throughout the market, including footwear and clothing in general. His competitors gave him discounts of up to 25% and took him completely by surprise. Its lack of presence in the market left it little choice but to participate.
Consumption slowdown
Last year, buoyant consumer spending was a major contributor to both the US and UK economies avoiding recession.
A huge amount of last year's spending was financed by debt, primarily credit cards. But added to this is an increase in the growth of buy now and pay later programs.
If someone fails to meet payment schedules under such plans, interest rates typically rise to around 25%. This is significantly higher than the average credit card interest rate. Debt capitalization means that a borrower can quickly accumulate enormous debts in a short space of time.
My fear is that consumers are at the limit of their debt and are unwilling or unable to take on more.
Growth trends
JD Sports is growing rapidly. It remains on track to open 200 new stores globally in FY24. Additionally, it is investing heavily in its supply chain, opening new automation distribution centers in the UK and Europe.
It has really tapped into the premium sports fashion industry. All regions are growing, but particularly Europe and Asia Pacific.
It has also become very adept at acquiring fashion stores from struggling retailers. A good example of this was the acquisition of Gap stores in France, which will open in prime fashion sales locations this year.
My main concern now is that the company could well have engaged in a huge capital spending program just as the economy is about to take a turn for the worse.
It is widely believed that inflation has peaked and interest rates are about to fall. I'm still not convinced on either front.
Regardless, I expect the stock to remain very volatile throughout 2024 and will be watching from the sidelines for now.