Six months ago, I was wondering whether Superdry (LSE: SDRY) might be a worthwhile recovery candidate, seeing as founder Julian Dunkerton had ousted the board, regained control as chief executive, and set the company back on its original path — a path that I thought was the right one.
But I steer clear of recovery candidates these days, especially ones whose business development I don’t really understand, after the agonising failures we’ve seen in the past few years.
Still, after bottoming out around the middle of August, sentiment started turning and, as of a couple of days ago, the shares had put on around 35%.
Warning
But that recovery came to an abrupt halt Friday, as the price crashed by 24% when the market opened, before regaining a small amount to sit on a drop of 17% at the time of writing. The fall was so severe it undid all of the 2019 recovery… and then some, setting a new 52-week low for the stock.
The trigger was a rather dramatic profit warning issued as a result of a disastrous Christmas trading period. While Black Friday had apparently gone well, since then retail sales had come in below expectations at only £23m as, in the words of the company, “we continue our strategic transition to a full price stance.” It seems people are happy to snap up Superdry clothing at a knockdown cost, but that suggests it might be harder than anticipated for the brand’s target to get back to a premium pricing level.
But the thing that’s really hit the share price is the effect that shortfall is expected to have on full-year profitability.
No profit?
Analysts were expecting to see around £40m this year, but that could now be completely wiped out. Superdry’s new guidance for underlying pre-tax profit indicates a potential range of £0-10m. Yes, zero. There might be no profit at all.
The high level of promotional activity in the period running up to Christmas was responsible, according to Dunkerton. But hang on a minute… did he really not expect that at Christmas? It seems obvious to me shoppers will prefer to buy the brands being sold at discounted prices in the fight for the festive pound, and those going for full-price high-margin sales are going to suffer, unless they have real appeal.
He did add that “our disciplined plan to reinvigorate the brand and return Superdry to sustainable long-term growth is on track,” but it looks like it’s going to be a longer track than expected.
Full-price folly?
I did think it a bit strange to see Superdry proposing a dividend this year, before the company’s recovery plan has had a chance to show any success, even if it was expected to be modest. Had a quick return to a full-price brand status been feasible, paying cash to shareholders might have been fine. But the firm seems to have misunderstood current shopping habits, and the idea of paying dividends before cash flow plans have been realised now seems folly.
Superdry, for me, is very much a ‘hands off’ stock, at least until we see if customers will go along with Dunkerton’s ambitions — or if Superdry is a has-been as a desirable mid-market brand.
