The JD Sports Fashion (LSE:JD) share price has had quite an explosive year so far. And this upward momentum continued its acceleration last week following the release of its latest earnings report. The news triggered a nearly 10% jump last Tuesday morning, pushing the 12-month return to just over 40%. But can this upward momentum continue? And should I be considering this business for my portfolio? Let’s take a look.
The JD Sports share price explodes on earnings
Given the trajectory of the JD Sports share price, I think it’s fair to say investors were quite pleased with its latest results. And I must agree. Total revenue for the first six months of 2021 came in at £3.89bn. That’s 52% higher than a year ago and significantly ahead of analyst expectations. As a result, operating profit for the period (excluding exceptional items) surged by almost 400% to £471.7m!
This appears to be one of the few instances where an acquisitive growth strategy quickly provided some substantial return on investment. £245m of the profits generated came from acquired businesses in the US. Even newer additions to the portfolio made significant contributions. Shoe Palace and DTLR, acquired in December 2020 and March 2021, respectively, delivered £72.9m.
It seems JD Sports has been a beneficiary of the second round of stimulus cheques issued in America. As intended, the injection of capital into the economy created a favourable retail environment that the company capitalised on. It’s worth noting that total operating profits from its US division only came in at £73.4m last year and £35.7m in 2019.
A similar performance story can also be seen here in the UK as online sales remained strong even after physical stores reopened. Knowing all that, seeing the JD Sports share price surge is hardly surprising to me.
The risks that lie ahead
Management issued full-year profit guidance of around £750m. This will be firmly ahead of that achieved before the pandemic started disrupting sales. However, one thing that potentially concerns me is sustaining this performance over the long term.
A large chunk of growth appears to be directly driven by an economic stimulus package rather than organic sources. Therefore, it’s quite possible that this growth will be short-lived. In fact, even in the issued guidance, management stated that the remarkable rise in profitability over the last six months shouldn’t be used as a guide to future performance.
Should sales start to suffer in 2022 and beyond, I think it’s more than likely that the JD Sports share price will fall.
The bottom line
I can’t deny the admirable progress JD Sports has managed to achieve so far this year. However, I remain cautious about its ability to continue delivering such high sales figures as stimulus cheques start running out. Personally, I’m going to wait and see how the JD Sports share price performs once the economic situation in the US starts to stabilise. Therefore, I’m not adding this business to my portfolio today.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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