An unexpectedly weak fourth-quarter trading update last month sent shares in clothing retailer SuperGroup (SGP) on a downwards spiral. But the real question is whether reaction to the news was overdone. We think it was.
The IMS reported a 1.3 per cent fall in underlying sales in the quarter, driven by the weather and heavy discounting. This trend is likely to spill into the first quarter of the current financial year as well. Management also warned that profit would be at the lower end of consensus expectations, prompting analysts to trim full-year forecasts by 2 per cent. But the extent of the share-price de-rating seems excessive, falling from a PE ratio of 19 for the 2015 calendar year to just 11, according to figures from Investec.
There are several factors that could explain this. One is that SuperGroup is very much a growth stock, so markets expect positive numbers. It's also possible that the huge sell-off in growth stocks that set in at the beginning of the year, most notably at Asos, along with weakness from other players in the market, such as Zara, has affected sentiment. And, as Peel Hunt analyst John Stevenson points out, SuperGroup still carries a level of 'stigma' from its turbulent history, so is prone to being particularly hard hit by any bad news. But he expects fairly positive full-year results, adding that a forward PE ratio of 14 for the current financial is is too cheap given the double-digit EPS growth and potential upgrades into the second half. Another City analyst has even suggested that the share price weakness was driven by liquidity, as there was no volume behind the sell-off.
