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Super Retail share price tumbles on margin concerns

In early trade the Super Retail Group Ltd (ASX: SUL) share price has come under pressure following the release of its first quarter update ahead of its annual general meeting.

At the time of writing the retailer’s shares are down 4.5% to $9.13.

How did Super Retail perform in the first quarter?

According to the release, during the first 16 weeks of FY 2020, the company has delivered total sales growth of 4.2% and like for like sales growth of 3.2%. Three of the company’s four brands have started the year in strong form.

The Supercheap Auto business has delivered total sales growth of 3.5% and like for like sales growth of 2.7% over the prior corresponding period.

The Rebel business has performed even better. It has recorded total sales growth of 3.9% and like for like sales growth of 3.1%.

But the star of the show has been the BCF business. It continued its impressive form with a 6.7% lift in total sales and a 6.5% increase in like for like sales.

This helped offset the underperformance of its Macpac business. During the first 16 weeks it posted a 3.8% lift in total sales, but an underwhelming 2.1% decline in like for like sales.

Management commentary.

Management explained that Macpac is cycling a strong sales performance in the prior corresponding period. In addition to this, its like for like sales also reflect refinements to its promotional and pricing strategy. This is part of its aim to strike the right balance between sales and margin.

The good news is that management remains confident that Macpac will continue to deliver shareholder value as it opens new stores, grows its digital sales, and increases its brand awareness in the Australian market.

Super Retail’s managing director and chief executive officer, Anthony Heraghty, appears to be pleased with the company’s start to FY 2020.

He said: “We have made a solid start to the year. While retail consumer sentiment remains mixed, the Group has delivered strong sales growth and like for like sales growth across our three largest brands. In response to a cautious consumer, we have activated a higher level of promotional activity across the business which has successfully generated top line growth but adversely impacted margin.”

I suspect it is the latter comment which has spooked investors today and led to its shares tumbling lower. No details were provided in respect to how much margin the company has given up to generate these sales, but investors appear to be fearing the worst.

Also sliding lower today have been the shares of McMillan Shakespeare Limited (ASX: MMS) and Megaport Ltd (ASX: MP1) after Q1 updates of their own.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of MEGAPORT FPO. The Motley Fool Australia owns shares of Super Retail Group Limited. The Motley Fool Australia has recommended MEGAPORT FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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