January was a bad month for clothing retailer Superdry (LSE: SDRY). The company was forced to warn investors that following a poor Christmas trading period – never something one wants to hear from any retailer – its full-year profits may be all but wiped out. The news sent Superdry’s shares tumbling almost 20%, a downward trend that has yet to really halt.
The problem with discounts
Aside from the obvious cause of any lack of sales – “subdued consumer demand” – Superdry also cited discounting on the high street as a cause of its problems. As my fellow Fool Michael Taylor rightly points out, discounting is a double-edged sword for retailers, particularly for those with a brand perceived to be at the higher end of the spectrum.
While discounting can certainly bring in footfall, it does so at a cost of lowering the profit margin on the products. As a short-term move, this can be a trade-off worth making. Generally speaking, if you can get a customer through your door once, they are likely to come again. But maintaining this strategy for the long run will simply eat into your profits.
For mid-market and high-end companies, the problem can be far more fundamental. As a society, we generally associate price with value, and while almost everybody loves a bargain, the perception of quality in the fashion industry is important and price is crucial to this. It may be partly a fiction, but we all go along with it.
Ask yourself, for example, would Louis Vuitton or Calvin Klein project the same image if you could buy one of their handbags for £10 rather that £1,000, or a set of boxer shorts ‘three-for-a-tenner’? At first, such a discount would seem like the bargain of the century, but if after a year the prices stayed the same, the brand would soon lose its value.
Superdry, while not in the same echelon as the highest of fashion designer brands, was certainly seen as cool, with its colourful, Japan-influenced clothing at a price that let consumers know (and anyone seeing a person wearing those clothes) that they had some money to spare.
Moving its prices away from this arena to compete with other discounting retailers has been backfiring for Superdry and it’s one of the reasons co-founder Julian Dunkerton fought so hard to get back in control. Under him, the company now seems to have realised its mistake, saying: “We halved the proportion of discounted sales over our peak trading period, benefiting both our margins and the Superdry brand.” Hopefully it isn’t too little too late.
Ready for a turnaround?
Unfortunately, while it now seems to be realising this mistake, I can’t see its fortunes changing any time soon. Dunkerton, who returned as CEO last year after a boardroom coup, admits that his plans will take two to three years to return the firm to sales growth. While Superdry’s share price may be pretty cheap today, I’m not quite willing to say it won’t go any further before a recovery happens.
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Karl 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.