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This high-flying growth stock still trades on an attractive valuation

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Shares in fashion retailer Supergroup (LSE: SGP) dipped 7% this morning, despite the company issuing a largely positive full-year pre-close trading update.

With most other clothing retailers on the high street struggling to compete with pure-play onliners like ASOS and Boohoo.com however, I think this is a stock worth grabbing. Here’s why…

Another great year

First, the numbers. Over the last year, group revenues at the £1.3bn cap rose by 27.2% to almost £751m. That’s impressive, even if sales are flattered by the recent weakness in sterling. According to the company, currency changes accounted for roughly one-third of reported growth in each of Supergroup’s sales channels.

Broken down, full-year revenue from its retail division for the came in up 20.6% with like-for-like sales rising 12.7%. Of particular note was the 35% year-on-year growth achieved from the company’s online activities, suggesting that Supergroup’s efforts to develop and offer a quality e-commerce experience have paid off. 

As far as profit is concerned, the Cheltenham-based business estimated that this would be between £86m-£87m for the full year and in line with market expectations.

Away from the finances, Supergroup finished the year with 555 stores — a 17% increase on the previous year. In Q4 alone, 26 new shops were opened. Elsewhere, work on developing distribution facilities in the US and Europe to match those in the UK “remains on track”. This is particularly important for the company given that it continues to perform strongly abroad, particularly in America where sales helped the company achieve a “break-even position” for the full year.

So why the fall?

Three reasons come to mind. First, investors may be slightly dismayed at the lack of profit upgrades, particularly given what the company has achieved to date. With competition fiercer than ever, it would seem that any retailer not forecasting even better figures ahead is enough to cause discomfort to holders.

Second, a few may have been concerned by the company’s remark that group level gross margins are expected to dip on a full year basis “in the range of 120 bps to 140 bps. At least some of this is down to the strong performance of its lower-margin wholesale division. Here, revenue for the whole year jumped just under 43% — higher than at its higher-margin stores — reflecting the company’s “renewed focus” on the channel.

Third, a traditional bout of profit-taking can’t be ruled out. Let’s not forget that, since the EU referendum vote, shares in Supergroup have climbed a very decent 35%. With consumers starting to rein-in spending as Brexit gathers pace and inflation is forecast to continue rising, it’s only natural if some investors head for the exits.

For those willing to overlook any short-term economic concerns however, I still think shares in Supergroup should appeal.  

A forecast price-to-earnings (P/E) ratio of 17 for 2017/18 — while unlikely to be of interest to value-focused investors — should still attract those looking for growth but unwilling to pay the eye-popping valuations currently given to the aforementioned pureplay operators. Aside from this, the company boasts a healthy balance sheet, continues to generate more-than-decent returns on capital and, as a result of expanding overseas, now offers a degree of geographical diversification.

While an immediate reversal is not guaranteed, I think today’s reaction represents a great opportunity for patient prospective owners.

Like Supergroup? You'll love this.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Supergroup. 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.