How investors could have avoided the Supergroup debacle

Friday, Apr 20 2012 by
9
How investors could have avoided the Supergroup debacle

I just hit the office to pick up the news via Twitter that the company that owns the ‘Superdry’ brand so beloved of the fashion glitterati ( Supergroup (LON:SGP) ) had just announced a rather spectacular and unusual profit warning - announcing profits would be about 14% below their previous estimate. As is to be expected the once high flying stock has seen its share price cut by a massive 31% since yesterday’s close - investors in the stock must be feeling incredibly burnt. What many of them won’t have known is that there’s a little known statistical indicator which had been screaming that this might happen for about the last six months.

Before we go into that, lets just take a closer look at the statement from the company which makes quite painful reading.

The Group expects profit before tax for the full year to be approximately £43m. The most material reasons for this are: There have been arithmetic errors in our forecast of the Wholesale business amounting to some £2.5m. Also, the Wholesale business is multi-dimensional, experiencing high growth levels and, given our rapid expansion and lack of history, it is difficult to predict accurately. There is a shortfall in the current year of some £2.0m due to the particular timing of pull-down of stock over the year end period by both franchise and wholesale customers. As this is largely a timing issue, the majority of these sales will fall into our FY13 result.

To put it mildly the company is admitting its not accounting for its growth particularly well, and stating ‘arithmetic’ errors doesn’t exactly inspire the greatest confidence in their finance department. Peel Hunt apparently stated “We have no confidence in delivery or market expectations, and struggle to see the shares as being investible.” and Singer stated the bleeding obvious “This latest calamity in SuperGroup’s short life as a listed company is not going to be well received”.

But dear Professor Messod Beneish had been statistically predicting this calamity all along. In June 1999 he published a paper called “The Detection of Earnings Manipulation” where he outlined an indicator he came to call the M-Score. The M-Score is calculated using a weighted formula consisting of 8 financial ratios that aim to capture the typical signals of high earnings manipulation risk companies. Some…

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SuperGroup Plc designs, produces and sells clothing and accessories under the Superdry brand in approximately 670 points of sale across the world, as well as online. The Company offers a range of products for men and women. The Company operates through three segments: Retail, Wholesale and Central costs. The Retail segment's principal activities consist of the operation of the United Kingdom, Republic of Ireland, European and the United States stores, concessions and all Internet sites. The Retail segment is involved in the sale to individual consumers of its brand and third party clothing, footwear and accessories. The Wholesale segment's principal activities consist of the ownership of brands, wholesale distribution of its brand products (clothing, footwear and accessories) across the world and trade sales. It offers a range of products, including t-shirts, polo shirts, hoods and sweats, joggers, tops, dresses, jackets, shirts, knitwear, footwear, bags and accessories. more »

LSE Price
1503p
Change
 
Mkt Cap (£m)
1,222
P/E (fwd)
17.5
Yield (fwd)
1.9



  Is SuperGroup fundamentally strong or weak? Find out More »


2 Comments on this Article show/hide all

Asagi 20th Apr '12 1 of 2
1

I blame ASOS (LON:ASC). If they hadn't been such a soaraway success maybe Supergroup (LON:SGP) would never have got such a rich rating.

I bet private investors have been stung by Supergroup, there was some opening for them at IPO and I understand the take-up was high.

Asagi (no position SGP, ASC)

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Edward Croft 20th Apr '12 2 of 2
1

In reply to Asagi, post #1

Interesting that the only screen SGP 'qualifies' for at the moment out of our 65 premium screens is the Beneish short selling screen. The smart money has been onto this for a while it seems - asked a hedgie friend if he'd managed to avoid it and he said - "Biggest short - thank god!!". Again one presumes that the man on the street is the one to suffer here in the traditional long only funds. Probably well dressed though.

http://www.stockopedia.com/share-prices/supergroup-LON:SGP/?auth=882c16cce75d0f0107f9555ebff103f6

Blog: Follow @edcroft on Twitter
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About Edward Croft

Edward Croft

CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »

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