We've long been wary about the growth prospects Cheltenham-based clothing retailer Supergroup (SGP). Problems in its supply chain and accounting errors made us question its bosses and, more important, we've been sceptical about the longevity and appeal of the Superdry brand, known for its hoodies, jackets and t-shirts emblazoned with the company's bright, eye-catching logo. Now though, a number of factors have led us to change our tack - prompted also by the momentum in its share price.
- Strong sales and profit growth
- Strengthened management
- Still lots of scope for expansion
- New warehouse will cut costs
- Shares have rallied strongly
- Buying in franchisees
The first is that SuperGroup is directing a lot of money into infrastructure, which will hopefully avoid the logistical nightmares of the past. New merchandising, management and point of sales systems are to go live after Christmas. A distribution centre in Burton-on-Trent, set to open in October, is a welcome development as the existing one is not up to snuff. Increased capacity here should support growth for the next five years, meeting demand for vital e-commerce sales, which rose 28 per cent in the latest full-year and account for 11 per cent of group revenue. Eventually, the warehouse should cut 20 per cent out of per-unit distribution costs too. True, initial savings in the 2013-14 financial year will be offset by transition costs, but from 2015, there should be operational efficiencies that will boost SuperGroup's beefy profit margins.
SuperGroup also seems to be strengthening its top management. Recent hires include an IT director, managing director for international and wholesale, a head of logistics, head of women's design and a group financial controller. This indicates SuperGroup isn't taking any chances as it invests in growth, recruiting the manpower it needs to put its plans into action successfully.
The clothes themselves offer another reason to be upbeat. The autumn/winter collection has been well received by the fashion press and the rather brash branding has thankfully been toned down. Tailored collections offer a more sophisticated look that will have broader appeal and tactical collaborations with well-known designers is another positive move.
| SUPERGROUP (SGP) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,175p | MARKET VALUE: | £946m | |
| TOUCH: | 1,173-1,175p | 12-MONTH HIGH: | 1,175p | LOW: 420p |
| FORWARD DIVIDEND YIELD: | 1.7% | FORWARD PE RATIO: | 19 | |
| NET ASSET VALUE: | 278p | NET CASH: | £54.5m | |
| Year to 28 Apr | Turnover (£m) | Pre-tax profit (£m)† | Earnings per share (p)† | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 238 | 50.2 | 45.2 | nil |
| 2012 | 314 | 42.8 | 37.9 | nil |
| 2013 | 360 | 52.2 | 47.4 | nil |
| 2014* | 400 | 60.1 | 54.1 | nil |
| 2015* | 453 | 68.0 | 61.3 | 20.4 |
| % change | +13 | +13 | +13 | – |
Normal market size: 2,000 Matched bargain trading Beta: 1.0 †Adjusted PBT and EPS *Canaccord Genuity forecasts | ||||
In its pricing, SuperGroup is on par with many of its high-street rivals, but is often cheaper yet claims to offer equal or better quality. But, in contrast to some competitors, SuperGroup still has a small global footprint, with huge scope for growth. This year alone it plans to open 50 franchised stores globally and to add 80,000-100,000 square feet in standalone stores. A new 10-year distribution agreement with a retail partner in south-east Asia will see three stores open in Kuala Lumpur, Malaysia, by early 2014 and further shops in Singapore. True, a plan to take full control over franchisees in Europe comes with a degree of risk, but it will speed up the store roll-out and improve profit margins on wholesale operations, while - hopefully - retaining the expertise of local management. SuperGroup has already agreed to buy out the distribution operation in Spain for €2.3m (£2m).
Turning to the share rating, the so-called 'peg' factor on SuperGroup's shares (the PE ratio divided by earnings growth) is 1.6 times based on three-year earnings forecasts. Granted, a peg factor of less than 1.0 is the ideal, then again SuperGroup remains a high growth company with a really strong balance sheet. There is also the likelihood that in a couple of years SuperGroup will start to pay dividends. Meanwhile, after their re-rating, the shares trade on approaching 22 times current-year forecast earnings. That's lower than some of the fashion trade's biggest hitters even though SuperGroup boasts superior sales growth, has strong profit margins and can reinvest its retained cash at attractive rates of return. Analysts at broker Canaccord Genuity reckon that Ted Baker generates an average 8.6 per cent cash return on assets compared with SuperGroup’s 16.2 per cent five-year average.
