Top up on good value SuperGroup

Key to SuperGroup's growth has been its expansion in mainland Europe. Last year, nine-tenths of shop openings by square foot were in Europe, which represented 73 per cent growth in selling space in the region, taking it to 31 per cent of total retail floor space. Payback on recent store openings has been very impressive at 23 months, seven months fewer than management had expected. Strong demand from Europe, and especially Germany, is also being felt by the wholesale business, which accounts for 30 per cent of group sales and 47 per cent of profit. The overseas business is also just starting to target the potentially huge US and Chinese markets, where trial stores have been opened following the group's decision to take back control of distribution and licensing rights in both countries.

The rapid overseas expansion means SuperGroup now generates 55 per cent of earnings outside the UK. This should help mitigate sterling's post-Brexit weakness, given about half of SuperGroup's products are sourced in US dollars, with the remainder in sterling. At the time of the results in July, the company also said it was sufficiently hedged against currency for the next 18 months.

Shop openings are not the only reason for growth. Indeed, like-for-like retail sales rose an impressive 11 per cent last year. Performance could be strengthened by new store formats being trialled in the UK, which aim to increase the amount of stock on rails rather than in the back room, while also increasing the amount of space for customers in shops. The re-fit programme is expected to be rolled out next year following initial success with the trials. The group has also been developing new brands and ranges to increase growth. This includes focusing on improving womenswear, targeting the 'ath-leisure' trend and developing its premium ranges. The retail business is also benefiting from the rapid growth of e-commerce sales which now account for 23 per cent of the division's revenue. That said, the added costs associated with fulfilling online orders did cause operating margins at the retail division to drop from 18.2 per cent to 16.3 per cent last year.

Overall, though, group operating margins rose last year ignoring the initial losses associated with 'development' markets in the US and China. This partly reflected a 60 basis point rise in gross margin to 61.5 per cent, which was helped by increased direct sourcing. Direct sourcing now stands at about 60 per cent of the total and continues to rise. The group is also looking at a number of other efficiency improvement including attempts to simplify the wholesale business following a period of minimal investment. This should build on already strong growth at the wholesale division which reported a 14 per cent rise in sales last year and a 31 per cent increase in operating profit, assisted by management getting a better handle on promotions.

Plans to establish new flexible distribution centres encompassing retail, wholesale and e-commerce under the same roof also have the potential to improve efficiency and stock management. This would build on last year's tight working capital controls that contributed to a surge in net operating cash generation from £26.1m to £72.1m. And even after a ramp-up in capital expenditure from £41.1m to £53.2m, the group increased net cash by £23.1m to £101m.

The net cash needs to be seen in the context of the growth in long-term lease commitments (an off-balance sheet liability that is similar in nature to debt) that have accompanied Superdry's retail expansion and rose by £29m to £380m last year. Nevertheless, the balance-sheet strength was sufficient to encourage management to declare a 20p special dividend last year on top of an inaugural full-year payout of 23.2p.