New Holding: Superdry Plc

Superdry (SDRY.L FTSE Mid 250, Market capitalisation: £954m, 1204p, 2.0% of JIC Portfolio and 0% of JIC Top 10)

I have bought a 2.0% holding following results this morning, for the year ended 30thApril 2018.

What it does:

Superdry PLC, formerly SuperGroup PLC, designs, produces and sells clothing and accessories under the Superdry brand in approximately 670 points of sale across the world, as well as online. The Company offers a range of products for men and women. The Company operates through three segments: Retail, Wholesale and Central costs. The Retail segment’s principal activities consist of the operation of the United Kingdom, Republic of Ireland, European and the United States stores, concessions and all Internet sites. The Retail segment is involved in the sale to individual consumers of its brand and third party clothing, footwear and accessories. The Wholesale segment’s principal activities consist of the ownership of brands, wholesale distribution of its brand products (clothing, footwear and accessories) across the world and trade sales. It offers a range of products, including t-shirts, polo shirts, hoods and sweats, joggers, tops, dresses, jackets, shirts, footwear, bags and accessories.

 

The share price reacted poorly to a 10thMay trading update in which it said that gross margins would be down around 200 basis points year-on-year. This was due to the “capital light” wholesale business commanding lower margins and due to stock clearance. Its Q4 was not helped by the “Beast from the East”. The share price dropped around 20%. It had already fallen c.20% from January’s high of £21.

Looking back, the shares were expensive in January and in no state to weather bad news. I think the shares now look good value and represent a good buying opportunity.

 

Todays’ results were pretty much in-line with expectations.

Highlights: 

Global brand revenue was up 22.1% to £1.6bn.

Group revenue was up 16.0% to £872m with wholesale up 29.6% and retail up 9.2%, including Ecommerce up 25.8%.

Underlying earnings per share were up 10.8% to 93.6p

It is paying a full year dividend of 31.2p, up 11.4% and a special dividend of 25.0p.

 

In its Q4 trading update it said that it expected high single digit revenue growth in the current year ending April 2019. This would be led by double digit growth in Ecommerce and Wholesale. It also expected “moderate operating margin expansion”. It stands by that guidance today.

 

Outlook Statement today: 

The Group’s continued strong financial development mirrors the progress delivered across each element of our strategy which has created an agile multi-channel business model with growth plans tailored specifically to each of our core markets. Together with continuing product innovation, this approach has resulted in strong revenue growth with margins diluted primarily as a result of structural sales mix and long-term investments to protect consumer selling prices from input inflation and to reduce inventory in order to drive future operating efficiencies.  

The business remains strongly cash generative, able to support the investments necessary to deliver our planned growth and further infrastructure development while providing cash returns to shareholders through an ordinary dividend and a second special dividend of c. £20.5m to be paid this Autumn. 

Our focus continues to be the development of a global digital brand and the delivery of long-term sustainable growth in revenue and earnings. We remain confident in delivering further growth in Global Brand revenue, led by our capital light channels of Wholesale and Ecommerce, and anticipate delivering a high single-digit increase in group revenue in FY19. In addition the Group will from the current financial year onward crystallise the cost benefits from our refined Design to Customer processes driving a moderate 20 to 50 basis point expansion in underlying operating margin.

Today’s results can be read HERE.

Other reasons to like it:

High cash generation. Operating cash flow was up 27% to £104m, helping net cash to grow from £65.4m to £75.8m. Return on capital improved from 24.4% to 24.9%.

Valuation:

According to ShareScope consensus earnings per share for April 2019 are 107p, rising to 122.3p in April 2020. Considering what they said today, I’m going to trim the 107p back to 104.8p and 122.3p back to 117.4p, giving 12.0% growth each year. On those back of the envelope figures the shares are valued at 11.5x current year earnings, falling to 10.3x April 2020. That looks good value to me for 12.0% earnings growth and for a company with net cash, that is strongly cash generative and achieves a return on capital in the low 20’s per cent.

Additionally, the forecast dividend yield for April 2019 is 3.1%, rising to 3.6% in April 2020. Buying now will ensure I receive April 2018’s final dividend of 21.9p and the special of 25.0p = 3.8% of the current share price.

The share price was up over 10% first thing but has drifted back to be up just 2.5%. I have gone to 2.0% to start with. I’m hoping it will break up out of the grey rectangle below. If it does, I will most probably add. If, however, it breaks down through the bottom, I will have to re-assess.

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