SuperGroup Slumps 25%

Published in Company Comment on 5 October 2011

Warehouse problems have created a growth-share dilemma.

So here's a textbook investment dilemma for dedicated growth-share investors, provided courtesy of fashion chain SuperGroup (LSE: SGP).

The mid-cap behind the SuperDry clothing brand today owned up to some "temporary" warehousing issues, which will knock up to £9m from its current-year profits. Essentially an upgrade to various systems to "meet future growth" has gone awry and in turn prevented stock from reaching the chain's UK stores. The shares reacted to this "isolated event" by slumping 25% to 753p.

Short-term botch

As you might have gathered from the words I've quoted above, SuperGroup reckons this warehousing botch is all short term. Basically it's an "unwelcome setback" and everything will apparently get back to normal during November. The group also announced new UK stores continue to open, and confirmed its international and wholesale operations had not been affected.

So perhaps today's statement provides a classic buying opportunity -- the chance to acquire a quality growth share on a very reasonable rating following a knee-jerk market reaction.

Pre-warehouse news, earnings this year had been expected to come in at around 61p per share. So assuming SuperGroup's systems are corrected and the lost profits can be recouped quickly, the underlying P/E here might be 12 -- not bad for a business whose 2011 results showed profits up 110% and whose subsequent first-quarter update revealed sales up a further 66%.

Bear view

That said, there's nothing worse than backing a growth business that doesn't live up to expectations... and loyal SuperGroup holders have seen their fair share of "short term" issues of late.

Back in May for instance, the company admitted turnover had been hindered when it was slow to distribute its summer clothing during the warm Spring weather. At the time the shares fell 22% to £12. Then during last December, SuperGroup revealed some adverse accounting changes, which caused the shares to drop 10% to £14.

And in light of today's news, the earlier departure of the company's long-serving chief operating officer -- and the lack of any replacement appointment -- has suddenly become quite worrying.

Plus of course you have the ongoing debate as to when SuperDry clothing will lose its appeal. Once 40-year-old dads are buying the stuff, the fashion trend must surely move in some other direction.

Textbook dilemma

So, yes, SuperGroup has become a textbook investment dilemma, for which I sadly can't offer you any clear-cut opinion. The shares do look good value, and my gut feel is that the price could be ripe for a shorter-term recovery if the warehouse issues are resolved and the next set of results reminds the market of the company's rosy sales prospects.

Yet I worry about SuperGroup's growing number of setbacks and that its fashion attractions will eventually lose favour. It'd become a stock that I'd always be looking to exit -- rather than add to -- and I've never really felt such investments are best way to generate long-term wealth.

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Comments

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theRealGrinch 05 Oct 2011 , 12:32pm

with the shares at 1800p Prabhat Sakya was recommending as a buy. read the article http://www.fool.co.uk/news/investing/company-comment/2011/02/07/super-name-super-company.aspx?source=isesitlnk0000001&mrr=0.10

and the rest of us warning at this overpriced cack

retire1asap 05 Oct 2011 , 7:26pm

The markets are obviously extremely nervous about SGP - any bad news and they immediately tank! They're still potentially a growth bargain but it is hard to see them as having a long term future due to their current narrow market but who knows? I have shares in them (currently down) and expect to have to sell in the next year or two, as I do think they are likely to go out of fashion, so timing the sell will be critical.

There are some great articles offering advice on what to buy and why but very little on when to sell. Surely the same kind of stats that provide a reason to buy could be used to provide a reason to sell? It would be interesting to see articles on which shares are reaching their peak and would be best sold! Also, what sell strategies are being used by other members?

F958B 05 Oct 2011 , 8:16pm

retire1asap

".....interesting to see articles on which shares are reaching their peak and would be best sold....."

The replies beneath the original article gave plenty of warning that SGP were very overvalued as an investment and therefore suitable for speculators only - and would need constant monitoring, with a disciplined approach to cutting losses quickly.

.

".....expect to have to sell in the next year or two, as I do think they are likely to go out of fashion....."

Those are the words of a speculator, not an investor.
Your focus appears to be simply on finding a greater fool to take the shares off your hands at a price that will make you a handsome gain and they take the loss for you.

I suggest that you approach your investing by selecting sensibly-valued shares of good quality, resilient companies which you would be prepared to hold for a long time; to enjoy the dividends and the gradual uptrend in the shares which will occur if profits make good progress and assuming that the shares were bought at a sensible price.
As I pointed out last night:
In the late 1980's, Warren Buffett bought into Coke.
Nowadays, he receives an annual cash dividend payout almost as large as his entire purchase cost - and he still has the shares which have been dragged higher by those persistently-rising payouts; his shares are worth multiples of what was originally paid.

As Buffett says: "If you're not prepared to own the shares of a company for ten years, don't bother to own them for ten minutes".

I say:
Buy quality businesses at sensible prices (P/E ratio etc) and sit tight for the long term. Let the good business get on with making money.
Only consider switching investments if the business genuinely ceases to be good (not just a drop in the share price, but a decline in the companys financial strength), or if there is an equally good business available at a much more attractive price.

retire1asap 06 Oct 2011 , 11:13am

I actually keep two separate portfolios. One containing proven track record companies (mainly ftse 100) that are reasonably high yield shares, that I'm unlikely to ever sell. I have a second that contains companies that I expect to see short term growth in and am expecting to only keep for a few years before selling - this is my punt portfolio! I'm sure I'm not the only one who has a "gamble" on certain companies, so wondered what others did with regards to deciding an appropriate time to sell? Do they just go by gut feeling or once they've gained e.g. 10% or is there a more methodical approach via analysis of figures, as per when deciding what to buy long term?

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