Pressure On SuperGroup To Hit Profit Targets

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 |  About: Supergroup Plc ADR (SEPGY)
by: Stockopedia

Investors will be hoping that this week's fourth-quarter trading update from SuperGroup (OTCPK:SEPGY, LON:SGP) will be enough to put the brakes on its recently falling share price.

The company behind fashion brand Superdry has seen its stock dip by £3.96 to £13.48 since the start of April, although the price is still up by 87% over 12 months.

In February SuperGroup said that rising sales meant it was on course to meet pre-tax profit expectations for the financial year, with consensus estimates at £63.0 million. If achieved (when the company reports in July), that would mark a 21% improvement on last year's £51.8 million.

Analysts have been constantly upgrading their earnings forecasts on the stock since last summer. Four brokers currently rate the shares as a buy or strong buy, five are neutral and there are no sell recommendations.

What to watch

Chief executive Julian Dunkerton floated SuperGroup four years ago at an IPO price of £5.00 per share. Since then the FTSE 250 stock has swung as high as £17.77 and as low as £2.71, driven in part by missed earnings targets and accounting errors in the early years. Apart from maintaining sales growth in its retail and wholesale divisions, investors will be looking to see whether strengthening margins in the first half of the year have been sustained.

What's the upside?

Across all London-listed apparel and accessories retailers, SuperGroup currently ranks highest in terms of company quality. Based on Stockopedia's QualityRank, which ranks every stock in the market using a blend of common quality factors, it achieves a strong 98/100. In particular, its average net margins over five years have been notably higher than its peers, which is why investors will be watching those figures closely.

What's the downside?

Despite its recent price dip, SuperGroup looks potentially over-priced against many valuation measures. According to Stockopedia's ValueRank, which scores companies using a blend of six valuation metrics, it ranks in the bottom 25% of the market for value attractiveness. Among those factors, its forecast price-to-earnings ratio of 20.8x is above the sector median of 15.2x. If it turns out that SuperGroup's valuation is over-stretched, any slip-up in hitting earnings targets could see the stock fall further.

Some investors may still have lingering concerns over SuperGroup's accounting as evidenced by the company checking 5/6 red flags on James Montier's notorious C-Score. This simple checklist aims to flag aggressive accounting practices across revenue recognition, depreciation rates and inventory growth.

Disclosure: No positions

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.