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Today (August 22) the quarterly results of JD Sportswear (LSE:JD). The London Stock Exchange Index (FTSE) Shares are up nearly 9% in today's trading, showing the positive reaction to the news. However, even with today's move, shares are still down 6% from last year. I think this is what could happen next year.
The results
Let's look at the news that came out today. Business beat expectations in several areas, showing a clear rebound in demand. This is important, as the previous quarter's results in May showed falling sales and a rather gloomy outlook. Let's also not forget that in January, the stock fell 28% in a week after a profit warning.
Fast forward to today and the picture looks different. Group comparable sales rose 2.4%, with organic sales growth of 8.3% in the second quarter. The company also opened 85 new stores during the period, and the acquisition of Hibbett was finally completed.
Confirmation of the deal offers interesting prospects for shareholders. The 1,179 stores in the United States that JD Sports will now control offer enormous expansion potential that could bring significant financial benefits.
North America being in the spotlight comes at a good time, as it is the best-performing region within the group. Indeed, regional organic sales growth of 13.7% during the quarter helped offset slightly disappointing 1.2% growth in the UK market.
The direction from here
Despite the (almost surprisingly) good financial results, the news generated some caution. The update noted that “The global macroeconomic environment remains volatile, so we remain cautious about our outlook for the remainder of the year”.
It will certainly take more time to see whether customers are spending sustainably and whether demand can remain high. However, growth in the US offers a more diversified distribution of revenue for the group in the future. This means that weakness in one part of the world can be offset by the US or another area.
The expectation for adjusted pre-tax profits is now £955m to £1,035m. Overall pre-tax profits last year were £991m. So it is clear to me that the business is not in as much trouble as some made it out to be earlier this year.
Thanks to today's results, I think more investors will feel comfortable buying the stock as a growth stock for the future.
Optimism in the air
The risk is that this was just a setback and that later this year we see a slowdown in sales. This could negatively impact the share price, but I don't think it will be serious. After all, the price-to-earnings ratio is currently 10.58, which is what I would call a fair value. The stock is not trading at a premium based on high investor expectations.
Putting all this together, I am seriously considering adding the stock to my portfolio after today's big news.
