Why the Super Retail (ASX:SUL) share price is crashing today

The Super Retail Group Ltd (ASX: SUL) share price is tumbling despite releasing a bullish trading update yesterday. The Super …

| More on:
Super Retail share price a man is being dragged backwards along the ground with two people in the background holding either leg. The man has a frustrated look on his face.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Super Retail Group Ltd (ASX: SUL) share price is tumbling despite releasing a bullish trading update yesterday.

The Super Retail share price fell 4.9% to $12.58 during lunch time trade – making it the second worst performer on the S&P/ASX 200 Index (Index:^AXJO).

Only the Flight Centre Travel Group Ltd (ASX: FLT) share price is faring worse as it slumped 5.3%, while the Webjet Limited (ASX: WEB) share price is in third spot with a 3.7% decline.

Super Retail share price derailed by downgrade

Super Retail has fallen out of favour after JP Morgan downgraded its recommendation to "neutral" from "overweight".

The broker believes the Super Retail share price is at risk of missing market expectation. This is despite the sports, auto and outdoor retail group giving a positive update on Wednesday that sent its share price jumping 1.7%.

When a positive trading outlook isn't enough

Super Retail has plenty of inventory, so it will probably avoid the COVID-19 supply problems facing its peers.

This means the Super Retail share price should benefit from strong consumer spending heading into Black Friday and the Christmas shopping season.

The group's like-for-like (LFL) sales are also holding up well despite lockdowns in New South Wales and Victoria.

LFL sales grew 10% in the first 16 weeks of the financial year and would have grown by 27% if Victoria and NSW were excluded, noted JPMorgan. LFL refers to sales at stores that have been opened for a year or more.

Super Retail share price is no bargain

"However, we see downside risk of up to ~7% to consensus earnings, while [Super Cheap is] trading on a relatively full 15.6x FY23 PER," said JPMorgan.

The broker also believes that Super Cheap's gross margins have peaked at 48% in FY21. That's 300 basis points higher than the pre-COVID average.

This is because Super Cheap, like many other retailers, did not need to offer discounts to attract sales. Widespread shortages of goods mean this is a sellers' market.

Margins and costs moving in wrong direction

But this is as good as it gets. JPMorgan is forecasting Super Retail's gross margin will contract by 70 basis points a year for the next two years.

After all, the lack of discounts and promotions can't last – something consumers will be happy about.

Further, costs are expected to increase and will outpace sales growth. JPMorgan believes expenses will grow by 6.6% over the next two years when sales are only forecast to rise by 6.4% a year.

The broker's 12-month price target on the Super Retail share price is $14.20 a share.

Motley Fool contributor Brendon Lau owns shares of Webjet Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Super Retail Group Limited. The Motley Fool Australia owns shares of and has recommended Super Retail Group Limited and Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Broker Notes

A man clenches his fists in excitement as gold coins fall from the sky.
Broker Notes

These ASX 200 shares can rise 20% to 50%

Let's see which shares are being tipped to rocket from current levels.

Read more »

A man holds his head in his hands, despairing at the bad result he's reading on his computer.
Broker Notes

Why Guzman Y Gomez shares are a sell

Goldman Sachs has given its verdict on the burrito seller.

Read more »

A man pulls a shocked expression with mouth wide open as he holds up his laptop.
Broker Notes

Top brokers name 3 ASX shares to buy today

Here's what brokers are recommending as buys this week.

Read more »

A couple makes silly chip moustache faces and take a selfie on their phone.
Broker Notes

Macquarie sees more upside in Telstra shares – What are they worth?

Telstra shares are up 34% over the past year, and Macquarie thinks there's more to come.

Read more »

A happy male investor turns around on his chair to look at a friend while a laptop runs on his desk showing share price movements
Broker Notes

What is Morgans saying about TechnologyOne, Wesfarmers, and Xero shares?

Let's see what the broker is saying about these shares.

Read more »

A man looking at his laptop and thinking.
Broker Notes

Are WiseTech shares a buy after its big acquisition?

Let's see what analysts are saying about this tech stock.

Read more »

ASX 200 shares broker downgrade origami paper fortune teller with buy hold sell and dollar sign options
Broker Notes

Are Bendigo Bank shares a buy, hold or sell? Here's Macquarie's latest recommendation

Should I buy the dip on Bendigo Bank shares today?

Read more »

Happy man working on his laptop.
Broker Notes

Leading brokers name 3 ASX shares to buy today

Here's why brokers believe that now could be the time to snap up these shares.

Read more »