IPOs (initial public offerings) are thin on the ground today. Companies are finding it difficult to raise money, as the markets are volatile and sceptical about new businesses.
So how on earth is it that I find myself punting a retail stock IPO?
A UK retailer in the fashion sector… floating just as the consumer market stalls… Give me a break!
On the face of it, it breaks all the rules. Yet, Supergroup could be this year’s exception that turns out to be a profitable punt.
Supergroup’s main brand, Superdry, can be seen adorning celebrities such as David Beckham, Jude Law, Helena Christensen, Shakira and Leonardo DiCaprio. We’re talking about street fashion, but with grade-A celebrity endorsement.
With 40 stores and 54 concessions in the likes of House of Fraser, the business is expanding quickly – it doubled turnover to £119m this year. New brands in development may well follow the success of the original Superdry.
The company is really a design & marketing business with a retail channel tagged on. It’s now looking for a stockmarket listing to widen its profile and expand its business. Of course, the founders want to cash in some stock too – forgivable, given that they started off the business over 25 years ago and haven’t cashed out until now…
What’s so different about this fund raising?
The IPO market sees so many weak companies looking to raise funds for all the wrong reasons. At times, it hardly seems worthwhile checking out the prospectuses any more. But every now and then, something comes along with an interesting story that makes you sit up and take a look.
Over recent years Julian Dunkerton, the founder has built an incredibly successful team and the business has been growing at a phenomenal rate. But more importantly, they have achieved one of the highest profit margins in the UK retail sector. This hasn’t gone unnoticed by the City. Private equity firms have been courting them for years, looking for a piece of the action. Wisely, Dunkerton told them where to go, fearful of the debt the private equity boys wanted to load onto his company.
The upshot is that the business is totally debt free. Management have developed their super-profitable business model from internally generated cash-flows.
This is vital. Management make much wiser decisions when they’re investing hard earned money back into a business. They learn the hard way how to do things properly and profitably. Money raised through debt, or early stage IPO, on the other hand, is often squandered as green management set out on a marathon long before they’ve learned to walk.
The business targets young fashion. Interestingly, this market segment appears to have escaped recession – mortgage-free youths don’t worry too much about the economy, it seems. The team are constantly working on new brands and aim to “set fashion trends by creating future classics”.
The difference between this company and so many wannabes is that these guys are actually out there doing it. Many IPO prospectuses describe grand plans of what managers want to do, and they expect investors to put up capital on the back of these wishy-washy ideas.
The potential of the Supergroup business lies in creating new products and brands that attract celebrity endorsement. This is what delivers the generous profit margins. And this is what leaves competitors scrambling to follow their designs. Supergroup has several brands in incubation and an experienced marketing team ready to push them. They have every chance of replicating earlier successes.
Internet sales are highly profitable and are going great guns. Not surprising when you consider their market – “young people and students – who want to look and feel good”.
So why is such a success story looking to raise funds?
This is the key question to ask when trying to separate the wheat from the chaff in the IPO market.
Nothing rankles more than businesses that come to market having only just set up shop. They have little cash flow and no balance sheet, yet the originators are looking to take out the majority of the float proceeds. These are the IPOs to look out for and avoid like the plague.
Though management will be taking some money from the float proceeds, they will still hold the majority of the shares following the listing. There shouldn’t be any concerns about motivating them over the longer term. Also, the offer will give employees stock in the company as part of an incentive plan.
About £20m is earmarked for working capital. Alongside the cash generated by the business, there’s plenty in the bank to roll out the extended business plan.
The plan is to open new stores, new product ranges, develop online sales, expand internationally and to push their new brands. Implementation of the strategy is already underway – this company isn’t hanging about.
The financials
The company is turning over £119m with £25m profits expected in April this year. The planned float will raise £125m, valuing the business at £400m.
So, the company will be selling at 16x earnings. Not bad given that the FTSE 250 is trading at 25x and general retailers at 15x. In these markets, it’s not possible to get an issue away at crazy multiples. Even solid, cash-generative companies like this one come to market at a sensible price – in fact a price that will leave quite some upside as the story continues to develop.
What’s more, look at what you’re getting…
Last year the group doubled turnover and profits – remember this was a terrible year on the high street for most retailers. Also, bear in mind that they achieved this just from internally-generated revenues. The business is at the stage where brand power is pushing growth and delivering great margins.
Of course, risks run deep and wide – fashions are flighty and even young people suffer from recessions if they’re deep enough. But what we’re looking for in an IPO is experienced and motivated management. We’re looking for a low risk business – that is a strong balance sheet and a strong brand with a loyal following. Most importantly, the price has to be fair. At 16x this year’s earnings, the price is fair. If the company continues to grow at anywhere near the pace achieved last year, the share price begins to look cheap.
When the issue gets away, Supergroup will go straight into the FTSE 250 – which will bring with it investor exposure. Fund managers are always looking for the next big thing, so the company is likely to get some attention.
You can register online at www.superdry.com/shareoffer and you will be notified in mid-March of how you can apply for the shares. Unfortunately, of the £125m fund raising, only £5m is earmarked for private individuals – but maybe they’ll change that nearer the time if there’s a lot of interest.
• This article was written by Bengt Saelensminde and was first published in the free daily investment email The Right Side on 1 March 2010.