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Super growth at SuperGroup

After a year's stellar growth, we still think SuperGroup shares are worth shelling out for
December 31, 2015

Fashion retailer SuperGroup (SGP) has spent much of the past year showing investors that it's capable of growing its brand in an already crowded marketplace. The brand strength was evident when it nudged up gross margin guidance earlier this month while delivering strong half-year numbers. Maintaining the allure of its clothes was a big concern at one time when every other man aged between 16 and 50 seemed to sport a heavily-branded SuperDry hoodie. But SuperGroup is now benefiting from a diversified product range, celebrity collaborations and increased control over its international expansion. We feel 2016 is shaping up to be another exciting year for the company and its shares.

IC TIP: Buy at 1,667p
Tip style
Growth
Risk rating
Low
Timescale
Medium Term
Bull points
  • Resilient trading in competitive environment
  • European expansion
  • Re-entry into US/Chinese joint venture
  • Maiden dividend
Bear points
  • Inventory transition
  • Promotional pressures

The latest set of half-year numbers demonstrate significant momentum in the business. Underlying pre-tax profits (which exclude financial derivatives for hedging against currency movements) grew 54 per cent to £19.3m. Excluding losses in the US, core pre-tax profits actually grew 74 per cent. First-half retail sales grew 31 per cent or 17 per cent on a like-for-like basis. More than 19 per cent of retail sales are now generated online, compared with 14 per cent this time last year. That's particularly impressive given the promotional pressure fashion retailers find themselves under as well as SuperGroup's own initiative to combine stock management for its physical and online stores. This is expected to pay off in the long term by improving product availability for online customers.

Recently, actor Idris Elba has also come on board, lending his creative eye to a new product range and fronting the new marketing campaign. Chief financial officer Nick Wharton says the range is classed as the "best product" on offer and has already sold out at multiple locations following its high-profile launch at the London Regent Street store.

So it seems SuperGroup continues to go gangbusters in the UK, having successfully targeted its niche demographic of the 'over-30 dad' who wants to look hip. But we believe the real upside from the stock in 2016 will come from the fact that international expansion is firmly back on the agenda. Importantly, this time SuperGroup wants to get its international push right. The group wants to add another 130,000 sq ft of retail space across mainland Europe by the end of the current financial year, with nearly half of that new space given over to the all-important German market. New stores are also planned for Scandinavia, where the group hopes to exploit its existing reputation for outer/sports wear.

But SuperGroup has other bigger markets on its mind as well, specifically the US and China. It bought back the brand's US distribution rights last March (having sold them in 2008) and has formed a joint venture in the Far East with Chinese group Trendy International. Mr Wharton admits the US turnaround has lost some momentum, but the group is still hoping to cut full-year losses back to roughly £3m compared with £5m last year. In China, Mr Wharton says it is very early days, but three stores are still scheduled to open during summer 2016. SuperGroup reckons the total investment for the China business would come in around £18m, although thanks to the 50:50 joint venture structure the company will only be liable for half that cash.

Cash really isn't a problem for SuperGroup these days. By the end of the half-year period, the company had £80m in the bank and was able to confirm plans to pay shareholders a maiden dividend worth 6.2p a share, which fits with its target of maintaining dividend cover at a more-than-comfortable 3-3.5 times. The company will also consider paying shareholders special returns from any surplus capital.

SUPERGROUP (SGP)
ORD PRICE:1,667pMARKET VALUE:£1.4bn
TOUCH:1,665-1,669p12M HIGH / LOW:1,725p750p
FWD DIVIDEND YIELD:1.5%FWD PE RATIO:21
NET ASSET VALUE:372pNET CASH:£80m

Year to 30 AprilTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201336052.247.40.0
201443162.057.20.0
201548763.258.70.0
2016*57872.568.721.1
2017*64584.380.324.7
% change+12+16+17+17

Normal market size: 1,500

Matched bargain trading

Beta:0.55

*Investec forecasts