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…

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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.

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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.

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