Automation And Reshoring Will Erode Apparel Demand Yet Permit Cautious Renewal

Key Takeaways

• Automation, reshoring, and remote work trends threaten long-term uniform demand and could shrink Superior Group's core addressable market.
  
• Rising compliance, sustainability costs, and client concentration risk may undermine margins and create revenue volatility despite diversification and operational efficiencies.
  
• Macroeconomic headwinds, customer concentration, cost pressures, acquisition risks, and disruptive industry trends collectively threaten long-term revenue stability, profitability, and market relevance.

Catalysts

Manufactures and sells apparel and accessories in the United States and internationally.

• While Superior Group of Companies benefits from the rising focus on workplace wellness and expansion in the healthcare sector-which has helped deliver steady growth in healthcare apparel demand-there remains considerable risk that continued automation and reshoring across the broader apparel industry will erode revenues and margins by reducing demand for traditional uniform products over the long term.
  
• Although the company's diversification into branded promotional products and remote onboarding kits aligns well with the ongoing digital transformation, the increasing trend toward remote and hybrid work environments may ultimately reduce the structural need for branded uniforms, leading to a smaller addressable market and placing long-term pressure on revenue growth.
  
• While SGC has demonstrated resilience by executing cost reductions and supply chain improvements, the company continues to face rising sustainability and regulatory scrutiny throughout its global sourcing footprint, which can drive higher compliance costs and capital spending. This threatens to limit future net margin improvement if not adequately mitigated.
  
• Despite organic growth and new customer acquisitions in its Branded Products and Contact Centers, Superior Group's ongoing exposure to client concentration and unpredictable decision-making cycles among its enterprise customers creates the possibility of revenue volatility and increased bad debt when key accounts encounter financial or operational distress.
  
• While SGC's investments in automation and AI across its contact centers and product selection offer operating efficiencies, intensifying competition from larger or more technologically advanced apparel and outsourcing providers-combined with persistent pricing pressure-risks compressing margins and diminishing the competitive advantage of SGC's diversified model over time.

Superior Group of Companies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Superior Group of Companies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Superior Group of Companies's revenue will grow by 3.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.4% today to 2.5% in 3 years time.
• The bearish analysts expect earnings to reach $16.1 million (and earnings per share of $1.13) by about August 2028, up from $8.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.1x on those 2028 earnings, down from 21.6x today. This future PE is lower than the current PE for the US Luxury industry at 18.1x.
• Analysts expect the number of shares outstanding to decline by 5.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.05%, as per the Simply Wall St company report.

Superior Group of Companies Future Earnings Per Share Growth

Risks

• Ongoing macroeconomic headwinds, including customer hesitancy tied to inflation, interest rates, and tariff uncertainty, continue to create a volatile demand environment, which could result in uneven or slower revenue growth in core segments over the long term.
  
• The company faces increasing customer concentration risk within both its Contact Center and Branded Products businesses, highlighted by the bankruptcy of a major call center client and the possibility that losing or renegotiating large contracts could lead to greater revenue volatility and potentially higher bad debt expense, weighing on net margins.
  
• Rising tariffs and evolving trade policy present persistent cost pressures, with Healthcare Apparel already experiencing margin decline from higher input costs and delayed price increases, indicating that margin compression may persist if costs cannot be consistently passed on to customers, thus eroding long-term earnings.
  
• Despite the company's acquisition strategy, challenges in integrating or rapidly scaling acquired brands could elevate selling, general, and administrative costs and result in goodwill impairments, hurting overall profitability and diminishing return on invested capital.
  
• Industry-wide trends towards automation and digitalization are leading to reduced demand for traditional uniforms and increasing competition from low-cost and digital-first players, potentially shrinking Superior Group's addressable market and placing long-term pressure on revenue and margins if the company cannot adapt quickly.

Valuation

• The assumed bearish price target for Superior Group of Companies is $14.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Superior Group of Companies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $629.9 million, earnings will come to $16.1 million, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of $11.21, the bearish analyst price target of $14.0 is 19.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.