Supergroup set to prove doubters wrong

That Supergroup's full-year underlying pre-tax profit came in at the lower end of market expectations is no surprise; the clothes retailer behind the Superdry brand warned as much nine weeks ago. Yet, the bottom line still grew by a fifth and the business is throwing off lots of cash. It’s expanding fast, too, although a chequered past appears to be keeping investors on the sidelines. Should it?

Profit before a number of one-off costs jumped to £62 million in the year to 26 April, only £1 million below consensus forecasts at the time of Supergroup's profits warning in May. Gross margins increased by 140 basis points and operating cash flow rose by over half to £73.3 million, leaving the company with net cash of £86.2 million. Return on capital is approaching 30%.

"With a strong pipeline of new stores, particularly in mainland Europe, we are well positioned for further profitable growth in the year ahead," said chief executive Julian Dunkerton. Forecasts from Investec Securities certainly suggest so. The broker expects adjusted pre-tax profit of £72.2 million this year, giving adjusted earnings-per-share (EPS) of 65.4p, and for earnings to grow by an average 14% until at least 2017.

Retail sales grew almost 18% last year and by 3.2% on a like-for-like basis, but much of the growth going forward will be generated overseas, and by an increasing focus on womenswear. That's why the streamlining of its warehouses into one massive distribution centre at Burton on Trent was crucial. It will save money, too.

Supergroup shares plunged to a one-year low in June and tested significant technical support at 800p. Thankfully for shareholders, that support held up, and the share price has improved since. But a new uptrend is certainly not established and any further recovery is likely to be uneven. Breaking above technical resistance first at around 1,170p then again at 1,250p will not be easy.

That said, once you strip out forecast year-end net cash of £123 million, worth 152p per share, Supergroup shares - currently at 1,044p - trade on less than 14 times forward earnings. In February it was on 26 times, and some peers - stand up Ted Baker - still are. Barring any slip-ups, the shares look undervalued.

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