Its shares may already be fashionable, but SuperGroup is still a great growth play.
Retail is a notoriously difficult sector to invest in. Fashions and fads come and go; share prices rise and then fall.
What's more, with VAT going up, and cotton prices rocketing, margins could come under pressure. This seems like a terrible time to be a retailer.
But there is a company that is bucking the trend: SuperGroup (LSE: SGP).
SuperGroup's main brand, Superdry, targets the youth market by fusing vintage Americana fabrics with pseudo-Japanese text. It is just about the hottest fashion label around. Celebrities such as David Beckham and Leonardo DiCaprio have been seen sporting Superdry products.
It is perhaps no coincidence that when Gap tried -- unsuccessfully in the end -- to launch its new logo, it had more than a passing resemblance to the Superdry logo (minus the stylized Asian script).
Clearly Superdry is cool, swank, fly, or whatever the youth of today call 'trendy'.
Just look at those figures
SuperGroup is taking advantage of the brand's 'coolness' to drive growth at an incredible rate.
The figures speak for themselves. In the 26-week period ended 31 October 2010, profit before tax was £14.6m, up 86.4% on the same period in 2009. The 2010-2011 Christmas Trading Statement showed an even more impressive 90.1% increase in total Group sales over the previous year. And, remember, we had one of the coldest and snowiest Decembers on record.
Internet sales exploded, too, by 243.3%.
Clearly Superdry fans were determined to get their Osaka T-shirts and Hakuyama knits, snowstorm or no snowstorm. If this growth rate is sustained, then with SuperGroup on a forward P/E of 27, the PEG ratio is only a little over 0.6. That's great value for a growth stock.
The best is yet to come
Clearly the company is growing like topsy. "Ah-ha!" cry the cynics, "but surely this growth is going to level off, and when it does the share price will drop like a stone?"
This is the perennial dilemma we face when investing in any growth stock. OK, the track record of growth is amazing, but how do we know it is going to continue? Why not take profits now?
For those lucky enough to have bought in at the IPO launch, there would be a lot of profit to take. From the IPO launch to today the share price has more than trebled to around 1,775p. But I would argue that the shares have plenty more upside. Indeed, if you haven't bought in yet, it is not too late to do so.
I say this is because SuperGroup is still in the early stages of its growth phase.
In the financial year 2010 SuperGroup had 42 stand-alone stores in the UK. This is growing at a rate of 20 stores a year, and will reach a forecast 150 stores in 2015. Internationally, the Wholesale division sells to distributors, franchisees, licensees and independent retailers in 70 countries around the world. This division is growing even faster, with growth forecast at 40-45 units per annum. The recent purchase of the CNC Collections European franchise only strengthens the company's hand.
In short, SuperGroup has a clear plan for growth, and it is on track to achieve it.
The strategy for growth is bolstered by the quality of the brand and the product.
The key is design: Superdry's clothes are designed by a brilliant UK-based design team, and then manufactured at low cost abroad. This results in high quality products that can be sold at a high price and with big margins. And this of course enhances the profitability.
So is there any reason to be bearish? Well, there was a worry about high cotton prices that knocked the share price back in December, but renegotiations with suppliers and selected price rises seems to have mitigated this.
Another question to ask is whether the company's business model is scalable. We will have to see whether a company with over 150 stores can be run in the same way as a company with just 42.
The other risk is that the Superdry brand suddenly becomes unfashionable -- but that seems unlikely to happen for several more years to come.
Overall, I feel that the growth will continue, and the shares will maintain their upward trajectory. But be prepared for a bumpy ride!
Ride the growth curve
So is this one of the growth stocks that Philip Fisher says that you should hold on to forever?
Well, actually, no. The share price of SuperGroup is likely to follow the shape of an inverted 'V'. Growth and momentum will drive the share price higher and higher, but at some point the growth will tail off, the shares will lose momentum, and the value of the company will fall.
French Connection (LSE: FCCN) is a classic example of this. You need to ride the upward advance and get off before the peak. And the key point is that we have a long way to go before we reach that peak with SuperGroup.
And what does the Japanese text on every Superdry logo really say? I don't know for sure, but how about "we're making shed-loads: you can, too"?
More company comment:
Prabhat Sakya owns shares in Supergroup.