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Are fundamentally undervalued JD Sports shares a good buy ahead of FY earnings?

JD Sports' delayed earnings tomorrow are expected to be better than expected which could give the company’s share price a boost after its dismal start to the year.

JD Sports Source: Bloomberg

At the beginning of the year JD Sports Fashion announced a delay to the release of its full-year (FY) results, out tomorrow, but said the numbers were set to be "slightly ahead" of expectations following a continued positive performance in January, with full-year headline profit before tax and exceptional items expected to be above £900 million.

JD had agreed with auditors KPMG to push back the announcement of its annual results to ensure KPMG had enough time to complete its global audit and to allow the group to report on the outcome of the divestment of Footasylum.

This came on the back of the Competition and Markets Authority’s (CMA) combined £4.7m fine which JD and Footasylum have to pay for breaching the rules around a merger blocked by the watchdog.

JD Sports bought smaller rival Footasylum in 2019 for £90m. However, in November of last year, the CMA ordered JD to sell Footasylum after an investigation identified competition concerns. Since then, the United Kingdom-based sports fashion and multichannel retailer of branded sports and casual wear opened several new stores in Leicester and in the city centre of Plymouth, creating over 100 new jobs, and pushed its retailers to incentivise shoppers to use ‘buy now, pay later’ (BNPL) schemes at the checkout to mitigate the cost of living crisis.

The online retailers, JD Sports, Size and Tessuti, have all run promotions in the past year offering deals for free standard or express delivery when using a ‘pay later’ option at the checkout. BNPL schemes, such as Clearpay, Klarna and Laybuy, are a form of credit, allowing customers to order items and pay for them at a later date or in instalments, interest-free.

Following US athletic wear company, Nike’s recent strong third quarter results, analysts interpreted the company’s comments about which retailers it will continue to deal with positively for the British group as the US giant reduced the number of wholesale partners by 50 per cent.

Despite the underlying positive fundamentals, the JD Sports Fashion share price had a tough start to the year, dropping by over 40% to its 122 pence low, a level last traded in July 2020.

Since then, it has managed to heave itself back up above the 200-week simple moving average (SMA) at 143p which is currently being revisited, however.

JD Sports daily chart Source: ProRealTime

It is possible that the recent sell-off from its 162p late March high is only an Elliott wave A, B, C correction, in which case another up leg may unfold in the days ahead. This is, of course, provided that no slip below the 122p March low is seen.

A rise above the recent high at 162p would need to be seen for the share price to be able to head back up towards the October and December lows at 194p to 199p.

Even in such a bullish short-term scenario the odds would favour another down leg towards the psychological 100p mark being made over the course of the year since the decline from last year’s high at 235p only seems to have made three Elliott waves to the downside with the fourth, countertrend, wave currently being formed to the upside. This would mean that a fifth and final wave to the downside remains to be seen.

Buying the stock at around current levels with a long-term view may thus not be such a good idea from a technical perspective but could still turn out to be lucrative on a weekly to monthly time horizon.

JD Sports weekly chart Source: ProRealTime

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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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