Key points:
- Supreme's last year results were good, revenue and profit up
- Forecasts for this year show both going down however
- Remember, stock markets are forward looking, it's the future that matters
Supreme PLC (LON: SUP) shares are down 33% this morning off the back of their announcement of results. Which are rather good which opens up the question of why the Supreme share price has dropped a third on the back of good trading results. The answer being that the forecast for this year is trading won't be so good. There seems to have been some channel-stuffing going on which is going to mean a destocking of the distribution chain this year.
This gives us a useful reminder of the great and basic stock market fact – markets are forward looking, not backward. It is what happens in the future that matters, not what has happened in the past. This is because, right at heart, the net present value of a share is the current value of the total future income stream from it. If trading results in the future will be worse then that share is worth less now. Thus our task in investing is to try to forecast what will happen – what has happened is only a guide for us.
It's this which can explain why Supreme's shares dive on the reporting of good past results. For within that report – although as usual stuffed a good few paragraphs in, after all the good news – is the information that current year trading results are going to be worse. Therefore, given that future-look orientation of the markets the Supreme shares are worth less now.
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The real understanding of Supreme's business is that it distributes to retailers. That means that the performance of retailers is determinant of Supreme's success. There was a worry about McColl's going under but that was assuaged: it was only 0.5% of turnover and invoicing went through Morrison's anyway. So the loss of business is trivial and there are no – as reported at least – credit losses.
The current movement in the Supreme share price therefore revolves around today's announcement of annual results. Which are good. Revenue is up 7%, gross profit up 17% – this means trading margins are increasing, a good sign. Profit before tax up 25%, for the past everything is moving in the right direction.
The problem is a significant slowdown in the lighting division. “The Group expects to deliver another solid, profitable year in FY23 but revenue and EBITDA are both expected to be below FY22 levels and below previous market expectations,” The reason for this is what can be known as channel stuffing. The varied retail outlets are seeing a fall in current sales. Which means that their past orders, made in expectation of higher levels of pull through, are now piling up at the retail level. Supreme expects the orders from retailers to be very much lower this year than last. Another way of looking at it is that last year's results are flattered by some of this year's real, retail, sales turning up in Supreme's last year sales to retailers.
Management expects this to clear and growth to return next trading year – but this year's results will be down on last year's. Trading positions really therefore depend upon two things. Is this really just a cyclical move in the lighting division? And will the other major sector, vaping, continue to outperform?
