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Supergroup PLC’s Future Is At The Mercy Of The Fickle Fashion Industry

Last Thursday, Supergroup PLC’s (LSE:SGP) shares lost up to a fifth of their value in the space of a few hours, after the company revealed that sales for the quarter to April 26 had fallen 3.1%.

Unfortunately, Supergroup’s share price has continued to decline, and as I write, the group’s shares have fallen by as much as 25% during the space of the last week alone.

It’s become clear that investors are now concerned about Supergroup’s outlook. Sadly, Supergroup has a reputation for volatility, suffering three profit warnings during 2012 and other self-inflicted woes, such as “arithmetic errors” in its guidance.

It would appear as if investors are jumping ship, before the company surprises with further warnings of poor trading performance. 

The nature of the industrySupergroup

Still, for the most part Supergroup is not to blame for its poor performance this time around. Granted, the company’s management has attributed the poor trading performance to a lack of clearance sales on eBay, but, for the most part, it would the company is a victim of the fickle fashion industry. As Supergroup’s Chief executive Julian Dunkerton explained:

“We, as a company, are in the clothing business. We are going to have moments when like-for-likes over-perform and when like-for-likes underperform.”

So the company’s investors need to be prepared for volatility. In addition, according to analysts the group’s sales have come under pressure as shoppers have been reluctant to spend on costly shorts and T-shirts, despite the UK’s economic recovery.

Nevertheless, Supergroup has stated that will not lower prices and run sales to shift stock and boost revenues, like its peers do, which implies that the company’s high prices could be putting off hard pressed consumers. 

Actually, considering the fact that discount clothing retailer Primark, owned by Associated British Foods, has seen sales surge by double digits during the past few months, it could very well be the case that Supergroup has got its pricing wrong. 

No room for error

After the company’s troubles during 2011 and 2012, Supergroup brought in new management and sales surged. As a result, investors were prepared to pay a premium for the company’s shares.

Right now the company trades at a historic P/E of 24, after reporting pre-tax profit growth of 22% since 2012. However, this high valuation leaves little room for disappointment and if the company cannot continue to notch up report double-digit annual growth rates, then the shares are going to struggle to maintain this valuation.  

Foolish summary

Whilst Supergroup's performance over the past year or so has been impressive, the volatile nature of the fashion industry means that the company's earnings will always be erratic.

That's why the best investors build a portfolio with a combination of both risky high-growth companies, like SuperGroup, and reliable dividend paying stocks, reducing risk and allowing them to sleep soundly at night.

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Rupert does  not own any share mentioned within this article. The Motley Fool has recommended shares in eBay.