The Motley Fool

Superdry isn’t the only struggling fashion stock

Superdry (LSE: SDRY) shares have been more out of fashion than its winter jackets in the hot summer and mild autumn and that doesn’t look set to change any time soon. Last week, the company blamed the hot weather mainly, but also a bad currency hedge for an expected profit miss.

The fashion retailer now expects full-year profits to be £23m lower than previous guidance. The share price collapsed on the news. The most recent share price dive is just part of a longer period of decline. The share price started the year at 1,980p. The stock now trades at around 733p, a fall of about 63%.

The latest news will not have been welcomed by the company’s shareholders. The reliance on winter clothing is being addressed, according to management, but this isn’t a new company. It’s surprising therefore that the weakness wasn’t identified and addressed well before now. The company is only five months into an 18-month programme designed to diversify its product range. Maybe this will address the issues that have just affected it, but it must also raise questions about management.

What to make of it

Given the sharp share price fall, I do think investing in Superdry is only for the brave. It’s possible the shares may be out of fashion for some time and even the co-founder has been selling down his shares, most recently in July when he sold a 6.7% stake in the company. Also, in recent days he has been critical of the strategy of the current management team. All that being said, with the company now trading on a P/E ratio only a little above 8 and offering a dividend yield of above 4% there could be potentially a big upside for investors if the company can turn itself around.

Another stock trying to get back in fashion

Burberry (LSE: BRBY) is another fashion stock looking to turn around its fortunes. During 2018 to date, its share price has also fallen, but by considerably less than Superdry’s. Since the start of the year Burberry has dropped by just over 6%. Its shares have most recently weakened due to concerns about the appetite for luxury goods in China. That’s an issue that has hung over the share price of luxury goods companies for a while now, ever since China introduced a clampdown on corruption.

For investors betting on a turnaround there are other risks, such as the high P/E ratio of just under 21 and the lower dividend yield of 2.5%. This makes Burberry seem risky in terms of expecting its share price to rise soon. The company is trying to move even further upmarket, which should boost margins and in the long term could be rewarding for shareholders, but for now the shares don’t scream value.  

The fashion sector does have some gems for investors however. E-commerce is a particular trend driving companies such as ASOS and Boohoo. These companies have grown quickly and may well be a better bet for investors wanting to tap into fashionable stocks. E-commerce is only going to grow and those companies that use it best will surely win market share and customers. To me, neither Superdry or Burberry come anywhere close to competing with the e-commerce challengers, and that should be a worry for investors.

Capital Gains

In the meantime, one of our top investing analysts has put together a free report called "A Top Growth Share From The Motley Fool", featuring a mid-cap firm enjoying strong growth that looks set to continue. To find out its name and why we like it for free, click here now!

Andrew Ross owns no share mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group, Burberry, and Superdry. 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.