The parent company of the Superdry fashion brand has issued a profit warning. On the back of this warning the company’s share price has dipped by around a third which is bad news for investors. The company still expects to report a healthy profit of around £43m which whilst good is behind previous expectations. This means that the company’s underlying forecasts have not been hit indicating something has gone wrong.

Superdry's Mass Appeal Could Be Faltering

The initial profit expectation released to the market in February was between £50 and £54m so a result of £43m is well short. More interestingly at the time (February) the results of £50-£54m were said to be at the bottom end of initial projections. The company blamed the drop in results on an internal accounting problem. The problem was said to have inflated results by around £2.5m in the company’s wholesale business.

The company also overestimated the demand for the company’s product towards the end of 2011. This resulted in a further £2m adjustment to the wholesale division. There were further costs incurred above the forecasts including delivery costs and increasing the management team.

The company chief executive had previously commented that they had seen competitors discounting deeper than they had ever done before. The knock on of this action was that gross margins became under pressure in order for the company to stay competitive. However margins in some fashion retailers have held up which casts doubts over the company’s ability to deliver higher margins going forward.

The company reported profits in its 2010-2011 trading year of £47m which was against a backdrop of an aggressive growth strategy. Therefore a result of £43m for 2011-2012 represents a significant dip in performance.

The company has changed its strategy somewhat in the previous 24 months. Historically the company sold its products through third party retailers. More recently the company has opened its own stores and reduced its presence in third party merchants. Whilst the removal of its presence in other store would reduce cannibalisation in its own stores it could have lost them some market share.

Clothing brands that operate in the mass market can decline as fast as they grow. Moving from wholesale to retail is a big shift in strategy and it will be interesting to see what happens. Many other brands have tried it and struggled so the next 12 months could be critical for the Superdry.