Interactive Investor

SuperGroup takes super pounding

31st October 2014 12:39

Harriet Mann from interactive investor

SuperGroup spooked the market on Friday with a profits warning as warmer weather forced it to bring forward a trading update originally scheduled for next week. We said recently that hopes of a sustainable re-rating may…be premature. They were. Clearly, new chief executive Euan Sutherland has his work cut out turning round the Superdry brand, but he can’t control the weather, and Christmas becomes even more crucial now.

With outerwear accounting for a significant part of SuperGroup's product range, warmer weather is a guaranteed drag on profits. Although some three-quarters of the retailers' full-year profits are generated in the second half of the year, it’s impossible to predict exactly how the weather will play out in November. Sector discounting and planned investment in its cost base will not help matters, either, so no wonder management has slashed profit guidance to £60-£65 million for the full year, about 12% below consensus estimates.

Second-quarter revenue rose 5% to £122.3 million, with an 11% jump in retail earnings to £71 million partially offset by a 4% fall at the wholesale business to £51.3 million - partners have been staggering deliveries because of the weather. Cantor Fitzgerald expected quarterly group growth of nearly 11% and for an increase of nearly 13% at wholesale.

"As the group enters its peak trading quarter, Superdry stores are well prepared and the group's growth strategy remains on track and unchanged by the short term external events being experienced," said SuperGroup. But the company does have issues.

SuperGroup's share price has halved since April to just 812p - it fell 8% Friday - and founder Julian Dunkerton stepped down from the role of chief executive earlier this month to focus on developing the brand and protect it in its overseas expansion. Dunkerton made way for Sutherland, who was briefly the boss of the Co-op bank before declaring it "ungovernable." This could be Sutherland's "kitchen sinking" process, an almost compulsory move for any new boss entering a company with difficulties.

"The share price might over-react to any negative news from the second quarter update because of perpetual concerns about the longevity of the brand," said Freddie George, an analyst at Cantor Fitzgerald, although he, too, remains upbeat.

"We continue to believe it was right for Julian Dunkerton, a genius on product, to channel the majority of his time into strengthening the ranges," he explained. "The ranges may be less fashionable than in previous years, but they still retain a compelling mix of good quality competitively priced, practical leisurewear that appeals to all ages and these characteristics, in our view, give the brand longevity. Sales though might become more volatile as the company now needs, in our view, to manage a step change in product development."

George points to the potential for SuperGroup to start paying dividends if it has £100 million cash at the end of its financial year as forecast. Trading on 15.5 times forward earnings, George maintains his 'buy' recommendation, but downgrades his target price to 1,000p from 1,500p. That, however, is hardly cheap. Christmas, and more seasonal cold weather, can’t come quick enough.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Related Categories

    Growth Investor