After last Monday’s initial public offering at 500p (raising £125m), investors can now buy into SuperGroup. The company is a terrific advertisement for British retailing.
SuperGroup began life as ‘Cult Clothing’ in Cheltenham’s indoor market. Cult Clothing had been set up in 1985 by CEO Julian Dunkerton (33% owner), then just 20 years old, with the help of a friend. The firm was funded by a £2,000 loan and a £40-a-week grant from the Enterprise Allowance Scheme. Dunkerton bought out his partner in 2000, by which time there were 12 shops, and since when the firm has gone from strength to strength. It now has 41 stores, 54 concessions in House of Fraser stores and a thriving internet/wholesale businesses. The big break came in 2003 when the SuperDry brand was launched, and quickly sported by the likes of David Beckham, Janet Jackson, Helena Christensen and Ben Stiller.
Given this level of celebrity endorsement, it’s not surprising the clothes have been flying off the shelves. For the 12 months to 3 January, sales rose 95% to £119m with like-for-like growth up 29% over Christmas. Looking ahead, the board predicts that adjusted profit before tax for the 52 weeks ending in April will be at least £25.7m. Yet bulls shouldn’t be lulled into a false sense of security. Consumer tastes change fast and niche brands such as this must retain their cachet without becoming too mainstream. That’s not easy when you’re growing fast.
SuperGroup (LSE:SGP), rated a BUY by Oriel Securities
I’ve been bearish on retail for some time. Facing headwinds such as tax rises, stagnant wages and shrinking household budgets, sector valuations are overstretched. I’d avoid luxury goods altogether and only look at consumer staples providers with strong value propositions and expanding internet operations (such as Tesco or Wal-Mart). If there is a double dip recession that triggers a rise in unemployment, price-conscious shoppers will rapidly switch to cheaper alternatives.
The stock trades on 2010 sales and p/e ratios of 3.6 and 23 respectively. These are too high, especially if the brand loses some of its kudos as it becomes less exclusive. There is also a risk that its 20% profits margins could come under attack from price deflation and rising costs. For instance, a strengthening dollar means Asian suppliers will soon have to hike prices in order to protect their businesses. Sure, there is a chance that SuperDry will be taken over by a larger rival. But at current inflated share price levels, the synergies of such a deal would have to be enormous to justify it.
Lastly, I’m also concerned that at some point House of Fraser – in line with rivals like Debenhams – will decide to pull the rug on its concessions to focus more on its in-house brands and improve profitability. Given all this, I value the stock on a ten-times operating profits multiple. After adding back the proforma net cash of £25m, that generates an intrinsic worth of roughly 360p per share.
Recommendation: SELL at 550p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments