What happened
Shares of Signa Sports United (SSU) were trading as high as 4% after the market open on Wednesday. The jump came after the company reported earnings for the fiscal second quarter of 2023, where sales and profits were down year over year.
Given the weak conditions in Europe, investors were likely optimistic following management's positive outlook for the next year.
So what
Sales of the company's various sporting goods are still being impacted by the weak economy in Europe. The company reported a 15% decline in active customers year over year, which led to a 23% drop in revenue compared to the year-ago quarter.
The economy in Europe has started to show signs of stabilizing recently, but consumer demand remains weak overall. This has contributed to high inventory levels, which is hurting Signa's profit margin. The company reported a loss of 59 million euros in adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). This was down from 15 million in the same quarter last year.
Given the weak trends, the stock has been in a downward spiral, but it's also starting to look very cheap. The shares now trade at less than one times annual revenue. That is cheap relative to the stock's previous trading history and the average price-to-sales ratio for the average company, which is 2.5.
SSU PS Ratio data by YCharts. PS Ratio = price-to-sales ratio.
Now what
Management is anticipating an improving business environment in fiscal 2024, with improving profitability to follow in fiscal 2025. The company recently hired new leadership to oversee its bike and tennis businesses.
The good news is that the management believes the worst is behind the business. Management is aiming to cut costs and streamline operations. If the company performs consistent with management's guidance for improving margins in the near term, the stock could rebound. Stabilizing sales and narrowing losses in adjusted EBITDA could be major catalysts.