Stockwatch: A share built for growth

Is momentum still on the upside at SuperGroup (SGP)? The mid-250 shares in this fashion retailer best known for its Superdry brand have more than doubled this year from 770p to test 1,600p after a strong trading update for the company's first-half year to 24 October.

Total group revenue growth was 22.4%, within which total retail soared 30.9% and wholesale rose a respectable 8.0%. Although retail sales benefit from weak comparative figures last year, when shops cited un-seasonally warm weather as compromising sales of autumn clothes, autumn 2015 has been warmer still.

SuperGroup appears to be benefiting from all-round growth - e.g. e-commerce supporting 15.5% like-for-like retail growth - although this measure is down on the 20.3% recorded for the first 10 weeks of the financial year.

While the wholesale business has faced a headwind of euro weakness versus sterling, it has benefited from new revenue from the US and continued overall growth. Margins are trending ahead of guidance partly due to the higher retail sales element.

When I drew attention three years ago at 630p it was along a rationale that a new chief operating officer and chief financial officer were tackling stock availability and warehousing IT problems that exacerbated the shares' plunging in hard-hit markets. The PE was modest and the balance sheet healthy not stretched - with negligible borrowings and intangibles at only 22% of net assets.

Story evolves from turnaround to growth/momentum

The vision is building Superdry into a global lifestyle brand, enhancing product offerings and infrastructure. Management says its UK estate of 100 stores is now optimal, despite past hopes for 150 stores, since British shoppers are web-savvy and in terms of opportunity cost it looks better to build on 30 stores in Germany - a bigger market to develop.

Marketing appears adept, e.g. recent sales helped by more focus on womenswear and better-quality new ranges, also opportunism such as casual rugby shirts which sold well during the rugby World Cup."Black Friday" later this month will herald special deals and management sees plenty of scope for this event on the continent also.

Strategy is to combine owned stores and franchise opportunities, also to capitalise on longer-term potential in the US and China. There have been 14 net new store openings in the first half, 11 outside the UK/Ireland, with owned retail space increasing 21.2% year-on-year - a genuine growth driver besides like-for-like sales.

Space has thus been added in Germany, US operations adjusted and a joint venture established in China - all such now being supported by the appointment of a global retail director. It helps explain why Canaccord Genuity - one of the company's brokers - has upgraded its share price target from 1,627p to 1,847p.

Nearer-term, management says it is well-positioned for Christmas trading and confident of meeting expectations for the full year to 25 April 2016, despite tough comparatives for the second half.

Strong top-line figures affirm SuperGroup as a growth company at a time when they are increasingly rare - why the stock trades on a forward PE multiple just over 20 times, reflecting underlying momentum and scarcity value. The valuation emphasis is very much on revenue/earnings given a scant yield of about 1.4% forecast, also net tangible assets just below 300p a share.

This helps explains a volatile five-year chart ranging between 1,700-1,800p peaks in 2011 and 2014, coupled with slides to 265p in 2012 and 770p only last January. SuperGroup is ideal for long/short traders according to trends in its operations and sentiment, but does look more solidly based also as a tuckaway.

Balance sheet supports further growth

The 2014/15 results showed no debt and intangibles representing only 17.6% of net assets - despite Superdry having strong brand value - which is a refreshing contrast to so many goodwill/intangibles-heavy balance sheets. The "current ratio" of current assets to current liabilities approached a very comfortable three times. i.e. a strong base for continued expansion. The cash position fell nearly 22% to £67.6 million as inventories rose 39% to £107.9 million, a key reason why net cash generated from operations nearly halved to £35 million.

Yet this largely represented investment in new stores, as well as stock overhang from last autumn - i.e. genuine investment in growth, as opposed to the example of Morrisons, which speaks perversely of "investing in low prices" when it really means catch-up versus rivals. The latest update cites Supergroup's net cash position improving to £80 million.

Fashion shakes off 'ugly duckling' brown feathers

A yesteryear adage was,"airlines and fashion" being classic high-risk sectors to avoid. Yet the internet has been a great enabler of storming performances from easyJet and ASOS, transforming such industries' economics towards a better-risked proposition. It still means clothing retailers need to be on-the-ball as to fashion opportunities and stock management; factors you can only effectively judge from the track record. SuperGroup appears to have recovered well from its 2012 crisis: a classic example of a founder-entrepreneur needing to bring in professional management.

There was then the bizarre situation last February where the chief financial officer had to resign due to personal bankruptcy, only two weeks after the chief operating officer departed unexplained and suddenly. The culture of professional managers can bring its own twists, but the current chief executive - Euan Sutherland - shows strong credentials. It's why I noted this last March at a low-point for the shares.

So despite this year's strong chart and a 20-times prospective P/E, Supergroup looks an increasingly robust prospect - to consider averaging into.

For more information see their website.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.