Will JD Sports Fashion plc turn from market darling to market demon?

Updated: 
JD Sports

Over the last year, shares in retailer JD Sports(LSE: JD) have soared over 50%, following huge rises in revenue and profits. However, yesterday's Channel 4 documentary, in which staff claimed that conditions in its Rochdale warehouse were "worse than a prison", threatens to put an end to the company's status of market darling. 

Should investors see this as a sign to take profits, or just a temporary blip, albeit one that any retailer would want to avoid, particularly at this time of the year?

Sacked for sitting down

Last night's documentary certainly didn't make for pleasant viewing. According to some of the 1,500 staff employed there, a punitive "3 strikes and you're sacked" policy operated at the Rochdale site.

In addition to having to endure airport-style security checks and random searches, workers were also threatened with dismissal if they sat down during shifts, and those employed through agencies were paid below the minimum wage. Revelations such as these have led Chair of the Business Select Committee, Iain Wright MP, to suggest that the company is treating its workers "like cattle".

In response, JD Sports issued a statement this morning saying that it was "deeply disappointed and concerned" by the footage and would be launching an investigation into the matterThe company stressed that all supervisory and security staff at the 24/7 facility would be retrained "as a matter of urgency" to ensure that its policies were correctly implemented. 

JD Sports also denied operating a strike policy or that workers could be immediately dismissed. The £3bn cap business said that it would "readily open" its doors to an appropriate independent bodyshould it wish inspect the company's facilities.

JD Sports isn't the first company to have its working practices questioned, of course. Online giants Amazon and ASOS, as well as JD Sports' biggest competitor, Sports Direct (LSE: SPD) -- have all been severely criticised over the treatment of employees in recent times. The question is, should today's response be enough for shareholders?

Time to top-up? 

No company is immune to setbacks -- it's how it responds that is key. By immediately outlining how it intends to tackle the problem rather than engaging in a public spat with politicians, JD Sports has at least shown a commitment to ensuring that its staff are treated with the respect they deserve. So long as management keeps its word, I view any slide in JD Sports' share price as an opportunity for prospective investors to build a position. Those already holding may even wish to top up.

That said, I sincerely doubt that any dip will rival the 50% plunge experienced over the last year by Sports Direct. Although some investors may wish to disassociate themselves from any company following such an affair, JD Sports' management seem better versed in public relations and recognise the importance of taking responsibility for turning things around. Contrast this with Mike Ashley's initial refusal to appear before a Commons Select Committee.

Trading on a price-to-earnings (P/E) ratio of just over 20, shares in JD Sports are certainly more expensive to buy than those of Sports Direct (on a P/E of just 7). Indeed, those focused on finding value and/or taking contrarian positions will view the latter as a far more tempting opportunity. Nevertheless, given the somewhat unpredictable behaviour of its management team, I know which retailer I'd back to recover quicker, however disagreeable yesterday's news was.

Mistakes happen

It's not just companies that face challenges. Indeed, one of our biggest tests in investing is learning the identity of our greatest adversary. It's not other private investors, day traders or the big institutions. Rather, it's likely to be the very person staring back at you in the mirror.

If you're keen to avoid making expensive errors in your investing career, I strongly suggest you read a special FREE report produced by the experts at the Motley Fool. The worst mistakes investors make contains some excellent hints and tips on how you can avoid making the most common blunders.

Click here for your copy.

 

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.