At first glance, it might look as if the JD Sports (LSE: JD) share price has crashed in the past few weeks. The stock has plunged from around 1,100p to 225p at the time of writing.
However, this is nothing more than a cosmetic change. At the beginning of October, management recommended what is known as a share split. The company issued five new shares for every existing share, splitting the stock to reduce the share price.
In theory, this has not had an impact on individual shareholders. The value of the business remains the same. It is just the number of shares outstanding that has changed. And with each investor being given five new shares for every existing share, each shareholders’ percentage claim on the underlying business has not changed.
When it announced the decision to split the stock, management noted that the resulting smaller share price would increase the “efficiency” of trading and “improve the liquidity and marketability of the company’s shares.“
Put simply, the JD Sports share price has become easier for investors to trade. There has been no impact on the underlying business.
Booming sales
According to the company’s latest trading updates, sales and profits are growing rapidly. The group reported a record result for the first half of its financial year, with revenue totalling £3.9bn, up from £2.5bn last year. Profit before tax jumped to £365m, up from £42m in the prior-year period.
And JD has plenty of capital to push forward with its growth ambitions. It had a net cash position on the balance sheet of just under £1bn the end of July 2021.
Management is investing heavily to boost the group’s international and local footprint. Much of the investment is going into enhancing logistics networks, with significant leases signed on new warehouse facilities this year.
Despite the company’s breakneck growth, management is maintaining a conservative stance. The organisation is wary of additional pandemic trading restrictions, which is why it is hoarding cash. The threat of disruption from e-commerce is also driving the group’s heavy investments in infrastructure and logistics facilities to improve customer service and streamline the fulfilment process.
The outlook for the JD Sports share price
Despite these risks and challenges, I believe that the JD Sports share price looks attractive at current levels. The company is one of the most successful UK retailers, and its investment initiatives suggest that the business is not going to slow down any time soon.
I am also encouraged by the company’s strong balance sheet. Many retailers have collapsed in the past due to high levels of borrowing. It does not look as if JD is going to make the same mistake.
As such, I would be happy to buy the stock for my portfolio today as a growth play. As the economic recovery continues, I think the corporation will continue to report rapid revenue growth.
Rupert Hargreaves 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.
