When Fashion Fails

Published in Company Comment on 20 April 2012

Shares in fashion retailer SuperGroup plunge 40% as it finds accounting errors.

This morning has been a brutal one for shareholders in fashion firm SuperGroup (LSE: SGP), following yet another profit warning.

SuperGroup crashes 40%

As I write, shares in SuperGroup -- owner of popular fashion brand Superdry -- have plunged more than 220p to 349p, crashing almost 40%. This hammer blow has smashed SuperGroup's market value down to a mere £280 million.

What on earth could have caused the FTSE 250 firm's shares to slump so dramatically (they were at an all-time low of 310p earlier this morning)? The simple answer is another profit warning, but this was no ordinary profit warning.

A triple whammy for its owners

In an unexpected announcement this morning, SuperGroup revised downwards its guidance for profit before tax to £43 million for the year ending 29 April. There were three reasons for this:

  • First (and worst), SuperGroup found "arithmetic errors" in its forecast for its wholesale business, amounting to £2.5 million. Arithmetic errors? Haven't SuperGroup's directors ever heard of Microsoft Excel, calculators or even the abacus?
  • Second, thanks to SuperGroup's rapid sales growth, it has admitted to a shortfall of £2 million "due to the particular timing of pull-down of stock over the year-end period by both franchise and wholesale customers". Although it claims "the majority of these sales will fall into [next year's] results", this smacks of incompetence.
  • Third, "the mix of sales through our various channels has impacted margins" and "we took the decision to increase our operating costs...and to accelerate investment in our management team". Again, these setbacks will cost another £2 million.

In total, these three setbacks will reduce SuperGroup's pre-tax profit by £6.5 million, or 13%. So why the much greater 40% drop in its share price?

All relationships are based on trust

There's an old expression (which President George W. Bush was famously unable to utter) that goes: "Fool me once, shame on you. Fool me twice, shame on me."

Put another way, almost all trust is gone when someone badly disappoints you for a second or third time. Having owned up to repeated errors in their management of this business, SuperGroup's directors have lost the confidence of the firm's owners. In this situation, the only sane move is to sell your shares and move on.

What's more, in my experience, businesses that admit to "accounting errors" usually have deep-rooted mismanagement problems that go right to their hearts. In fact, those two words are one of the best sell signals that I've seen in 25 years as a private investor.

SuperValue?

Having floated at 500p in March 2010, SuperGroup's shares exploded, briefly getting close to £19 in February 2011. Since then, they have tumbled again and again to today's 349p. I gave SuperGroup's shares my thumbs-down at 576p in February, since when they have fallen another 39%.

Today, SuperGroup shares trade on a forward price-to-earnings ratio of 12.2 and offer a tiny dividend yield of 0.5%, covered more than 15 times. While its rating is now more in line with its peers, SuperGroup's shares come with a fair degree of operational risk. Indeed, before buying, you have to question whether this clumsy management team deserves your vote of confidence.

No doubt more details will emerge when SuperGroup issues its next interim management statement on Thursday, 10 May. However, given its executive weakness, I'd steer clear until heads roll and the business shows clear signs of upward improvements.

Right now, this is a share for short-term traders, rather than long-term investors!

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Comments

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amsterdamgroove 20 Apr 2012 , 11:31am

Novice question... I do still believe in the quality of Superdry's clothes and I see room for expansion abroad. Would it be wise to buy shares at this price? They are a bargain but I am worried that things could get worst in the future. Are there many past examples of companies with quality products failing investors simply because the people at the top cannot even get their numbers right? Thanks

CunningCliff 20 Apr 2012 , 11:50am

One market rumour is that the Superdry brand is losing its appeal, with more and more sales coming from outlet stores and eBay.

What's more, I suspect that SuperGroup's current rating after this profit warning is closer to 15 times earnings, making its shares both expensive and risky!

Cliff

TMFBoing 20 Apr 2012 , 12:28pm

Superdry clothes never really sold on quality (though I don't doubt they're well-made rags), they sold on fashion and celebrity endorsement.

There are some exceptions, like Burberry which has managed to remain fashionable for a long time, but most "Ooh, David Beckham is wearing it" fads only have a short time in the sun.

I'm with Cliff on this one (as I have been all along).

Foolish best,
Alan
TMFBoing

vinchainsaw 20 Apr 2012 , 1:01pm

SuperDry is now sold in TKMaxx... and a good mate of mine was recently looking to buy a SuperDry jacket.

So he tells me this story about how he was in TKM and was trying on SD jackets.
So he remarks that he had to buy a large as the mediums were even too small for him, followed by a remark that it was because the clothes were made for little Japanese people! Erm no bud, I was forced to say, you've just put on a wee bit of weight around the midrif over the winter...

amsterdamgroove 20 Apr 2012 , 1:05pm

The T-shirts and hoodies may not be of great quality (but who makes T-shirts of great quality anyway?), but jeans, windcheaters, and leather jackets are very well-made and better than Hollisters et al.

Whether the brand it is loosing its appeal or not, that is a different question. In my opinion the quality of their clothes and stores is top.

Wasn't Burberry also a "fad with a short time in the sun" just a couple of years ago?

I do get the point with the 15 times earning being too much for what seems to be an error-prone company.

theRealGrinch 20 Apr 2012 , 2:37pm

In Feb 2011, 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.

CunningCliff 20 Apr 2012 , 2:50pm

amsterdamgroove, "jeans, windcheaters, and leather jackets are very well-made and better than Hollisters et al."

Are you auditioning for the Grease musical, AG? ;0)

Cliff

AleisterCrowley 20 Apr 2012 , 3:09pm

i>Wasn't Burberry also a "fad with a short time in the sun" just a couple of years ago?

Yes the Burberry baseball cap chav range
They realised they had screwed up and are back aiming at traditional well-heeled raincoat buyers..

I avoid all fashion brands because...well...they go out of fashion as quickly as they come in, sometimes for no apparent reason. I looked at SuperGroup but carefully invested in Cable & Wireless instead.
Oh dearie me.

kiffberet 20 Apr 2012 , 4:22pm

They opened a bit store in Norwich city centre last year, but I don't go in because, there's usually more staff than customers... And that's on a Saturday! Their day in the UK has come and gone IMO.

andrew97d 20 Apr 2012 , 4:57pm

The best clothing shop (investment-wise) would be one where a reliable set of customers keep coming back for the latest colours etc, even if what they have is still functional. A bit like Apple customers. The only store that fits this bill is Rohan, but that is owned by Clarks shoes and not available for public investment (AFAIK).

JohnnyCyclops 21 Apr 2012 , 11:09pm

SuperDry (the brand) struck me as a one-trick pony, once I saw nearly every teen and their dad's wearing it on a Saturday down the highstreet/shopping centre.

There's the 'devil may care' punt on an upswing or bounce, but really the management team needs running out of town for gross mismanagement... not knowing which year sales were booked, and not totting up the profits properly. This is fairly basic. How can anyone make a P/E forecast when the E is simply suspect. Total punt.

I'm 30% 'sure' the firm will rebound, and the share price with it, but I'm not going to place a bet on it. The other 70%? My comment above... the UK market I'd say is near saturated and as soon as the next trend comes along they'll be dead in the water for the SuperDry brand. Their hope for future stellar performance will be to create new and diverse brands, not keep milking the SuperDry cow. It's to be seen if the management can conjour a second brand as strong as SD has been the last few years.Or perhaps they're too busy trying to figure out debits from credits.

amsterdamgroove 22 Apr 2012 , 12:19am

>Or perhaps they're too busy trying to figure out debits from credits.

JohnnyCyclopsAlthough I am 50% down on my SGP shares, I had to laugh at your comment. Probably this is the best way for me to

amsterdamgroove 22 Apr 2012 , 12:21am

... cope with the fact that I will have a hard time getting rid of the shares.

JohnnyCyclops 22 Apr 2012 , 9:07pm

Amsterdamgroove... <I am 50% down on my SGP shares, I had to laugh at your comment.

I looked late 2011 (I think, can't be sure of date) when they were back around 900p, having completely missed the IPO and the ramp up to 1800p and considered investing but let it go (because I was focused on building a high yield portfolio, not for anything of concern with SGP). Always easier to read trends looking in the rear view mirror, after the event. but more important than fashion trends is the mgmt's trend around safely running the business and the accounts.

supasap 23 Apr 2012 , 2:31pm

Is it just me but any customer of or investor in, a company that sells jeans at 74.99 that are virtually indistinguishable from a pair that is on sale at primark for 7 quid, is asking for trouble, add to this the fact that nearly everyone has got too many clothes anyway and it is a recipe for disaster, I had never heard of these cowboys but I fancy going short

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