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.
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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