The Superdry (LSE: SDRY) share price was hit hard yesterday. The company was forced to halt its dividend and announce a further fall in sales. Its stock tanked about 14% at one point. As I write this it has bounced back, up about 7% on the day, but what does the long term look like for the company?
The Covid problem
Superdry’s numbers were not good. The company said full-year sales dropped nearly 20%, and reported an underlying loss before tax of £42m. Understandably, Covid and its surrounding uncertainty have been taking their toll.
Until lockdown restrictions were eased, this of course included the closure of all its physical stores. These latest results do not include period since most stores have reopened. Unfortunately though, the Covid impact is looking more likely to keep going rather than easing.
In both the UK and Europe, there are growing fears of a second wave during the autumn and winter months. This means further lockdown and social distancing measures. At this stage, we don’t know to what extent these will happen. But even without another enforced closure of Superdry stores, Covid concerns will keep people indoors.
As I have said from the start, people don’t buy new clothes to sit in their houses. There have been some exceptions to this, particularly when people could socialise outside in the good weather. It seems far less likely winter will see the same kind of enthusiasm for this however.
Do discount clothes mean a discount Superdry share price?
One area of concern I have for Superdry shares is the discounting the company is undertaking. Despite attempts to move to a full-price focus, clearing old designs created before its strategy reset and clearing Covid-hit merchandise has meant major price cuts. Following store closures, summer ranges were stockpiled. Superdry has been offering lower prices to clear the excess.
To listen to Superdry’s co-founder and CEO Julian Dunkerton, who returned to the company after a boardroom coup, you would think this is a new development. However that isn’t actually the case.
I was already writing about my concerns for the company’s discounting policy in February. Then, following poor sales over Christmas, Superdry was citing competition from its high street rivals as the reasoning behind its sharp cuts.
At that point my concerns boiled down to two key points. The first is that discounting only brings in more money if it increases sales enough to offset the price difference. It now seems obvious this has not worked.
More fundamentally, I think discounting too deep for too long can damage the brand. Society often associates price with value. If Superdry starts to be seen as a discount store, it may never recover its image. Given that Superdry has now been discounting for some time, my original concerns are even more apt.
Even worse, I think consumers get used to price levels. A weekend or Christmas sale is one thing – people feel like they are getting a bargain. But if clothing at Superdry is on sale constantly, that simply becomes the price with a ‘sale’ label next to it. It may find raising prices once again hurts demand more than it might normally have done. So I think there is far too much risk to the downside for Superdry shares.
Karl has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.