The share price of fashion group Superdry (LSE: SDRY) fell by another 30% on Wednesday morning after the retailer warned that poor sales in November and December could see full-year profits fall by as much as 40%.
Today’s shock drop mean the stock has fallen by 80% so far in 2018.
Obviously I was too optimistic back in October, when I thought that the group’s performance might be stabilising.
In this piece, I want to take a fresh look at this business and give my verdict on today’s figures.
What’s gone wrong?
Blaming the weather for falling profits is quite common among fashion retailers. In this case it probably is fair to say that a mild autumn in the UK, Europe and US East Coast means that sales of winter coats and sweaters will have been lower than usual.
Unfortunately, November and December are the group’s two busiest trading months. And cold weather clothing normally accounts for 55%-60% of Autumn/Winter sales.
As a result, profit fell by £11m in November. A similar hit is expected in December.
Chief executive Euan Sutherland now expects the firm’s full-year underlying pre-tax profit to be between £55m and £70m. The equivalent figure last year was £97m, so profits could fall by up to 40% this year.
The weather isn’t the only problem
If Superdry’s problems were solely down to the weather, investors might have taken a more relaxed view on today’s profit warning. After all, Superdry still has net cash of £19m and has not cut the dividend.
However, I think that today’s results highlight several other potential problems.
The first problem is that profit margins keep falling. The group’s sales actually rose by 3.1% to £414.6m during the half-year period, but underlying profits fell by 49% to just £12.9m. The group’s underlying operating margin during the half year was just 3.6%, down from 6.7% during the same period last year.
Why are margins falling? The firm talked today about “a weakening, discount-driven consumer economy”. But it also looks like costs are rising. The half-year accounts show an extra £15.8m of operating costs during the period.
Stores vs online
Mr Sutherland said that most of these extra costs related to logistics and store openings. This leads me to another concern.
The number of stores operated or franchised by the firm has risen by 15% to 695 over the last year. In contrast, the percentage of sales generated online rose by just 1.7% over the same period, to 26.9%. That doesn’t seem very high to me.
I think Superdry should be focused on generating more sales online, rather than opening so many costly new stores.
New ranges could solve the firm’s problems
In today’s results, CEO Mr Sutherland said that “a lack of innovation” in some core product ranges had contributed to the firm’s problems. He plans to broaden the group’s range and move into new categories, such as kidswear.
Better product ranges could help to solve the firm’s problems. And the shares could certainly be cheap at this level if there are no further profit warnings.
There’s a risk that profits will continue to fall, but I would cautiously rate Superdry as a turnaround buy after today’s news.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.