Watch out for shrinking margins

Marc Sidwell
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OPTIMISTIC words from SuperGroup’s chief executive and co-founder Julian Dunkerton couldn’t stop yesterday’s interim results from sending the owner of the Superdry clothing brand down by almost seven per cent.

The market’s reaction may seem harsh. A profit warning this April, blamed on bad arithmetic, knocked the share price down by nearly 40 per cent, but shares had been on the up since the summer, and there is a sense of the retailer returning to an even keel, with no great surprises in the headline numbers yesterday.

Still, there are reasons for concern. Profit before tax was down 31.5 per cent, due to a writedown on the acquisition of SuperGroup Europe.

That, at least, is a one-off. More concerning is that retail, which accounted for 58 per cent of revenues in the first half of 2012, produced a flat underlying profit of £7.1m despite 26.4 per cent revenue growth, bringing a 200 basis point dilution in the division’s operating margin. That was partly down to the cost of discounting but it was also because warehousing costs increased by more than the growth in sales.

SuperGroup is growing aggressively, opening another 45 stores in the first half of the year and planning to add the majority of its annual target of 70-90,000 square feet of new retail space in the last quarter of the financial year. But boosting sales by building an empire is no help if the costs eat into your profits and older stores don’t keep growing. Excluding new stores, sales growth is only 3.9 per cent – and that includes web sales.

SuperGroup’s internet sales really are growing at a respectable clip – 24 per cent year on year. But such sales are a long way from being the heart of the business, having only grown from 8.2 per cent of group revenues in 2011 to 10.2 per cent in 2012, on a rolling 12-month basis.

Shareholders don’t get much say in how SuperGroup is run, with more than 62 per cent of shares in directors’ hands. After a failed pay revolt in September, a few are realising that the only way to vote is with their feet.