After falling 50% in five years JD Sports Fashion The (LSE:JD) share price is currently trading at less than a pound. In fact, just 88p compared to 233p at the end of 2021.
It reflects the fall Diageoanother FTS 100 shares peaked in late 2021. It was the twilight of an era of near-zero interest rates, a time when inflation was under control.
Diageo and JD shares have fallen 62% since their peak.
What’s wrong with JD?
Another consumer stock that fell off a cliff: Nike. It has fallen about 76% since November 2021. And this is due to the fall in prices of JD, since Nike is a key supplier of JD.
The common theme, of course, is a reduction in consumer spending. With the cost of living much higher than in 2021, more disadvantaged consumers are looking for bargains rather than expensive sneakers. This challenged JD’s traditional pricing strategy.
Youth unemployment is also a problem. There were 112,000 more unemployed young people in the UK between March and May than the year before. Their unemployment rate was 16.4%, down from 14.2%.
Government policies have not helped, business groups say, but youth unemployment is also a problem in the US, China and parts of Europe. Around the world, AI is unfortunately automating entry-level jobs that young people have traditionally relied on to start their careers.
So a £150 pair of Nike trainers went from being a wardrobe item to being a wallet. And shoes make up 60% of JD’s sales.
Gloomy outlook for the whole year
With its core customer base under pressure and Nike still the best-selling brand, JD is struggling to increase like-for-like (LFL) sales.
They were down 2.1% last year, despite total revenue rising 10.5% to £12.7bn thanks to the acquisitions of Hibbett (in the US) and Courir (France). The weak trend continued in the first quarter, with like-for-like sales down 2.3%.
For the full year, management is forecasting pre-tax profit and adjustments of £750m to £850m, a wide range reflecting ongoing macroeconomic uncertainty. Last year the figure was £852 million.
As such, earnings are expected to remain under pressure, which does not bode well for the share price in the near future.
What is the latest target price?
However, City analysts have a buy or hold recommendation on the stock right now. No one thinks it’s worth selling while it’s trading so cheap (currently trading at just 10.4 times earnings).
Their average price target is 104p, up 17%. This means a £5,000 investment could turn into almost £6,000 by July next year if the brokers are right (which they often aren’t).
I have no intention of buying JD stock, especially since the war in Iran is expected to cause even more inflationary pressure over the next few months. It doesn’t look like the background will improve anytime soon.
Additionally, although JD increased its dividend by 20% last year, its yield is only 1.35%. There are other potential recovery stocks in a similar situation that offer much higher dividend yields (Diageo, Nike and Greggslet’s name three).
Over the long term, these penny stocks could recover significantly if sales growth resumes. But this will depend on rising costs of living and youth unemployment rates, which unfortunately look pretty entrenched at the moment.
Given that JD may remain a dead stock for some time, I see better opportunities to look elsewhere.
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Ben McPoland owns shares in Diageo.
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