At the start of December, I explained why I had recently added shares in Superdry (LSE: SDRY) to my portfolio. That has already been a lucrative decision, with the share price jumping more than 50% over the past month.
But I think there could be further gains to come. If I had spare cash to invest today, I would consider buying more Superdry shares, even after their steep climb in recent weeks. This is why.
Price mismatch
Last month, Superdry shares looked like they were priced for disaster. The company had a market capitalisation of under £100m, despite having limited debt and a strong brand.
But there really was a risk of disaster. The company was rearranging its borrowing facilities, having begun negotiations with a specialist lender. As an investor, that does not inspire my confidence in a firm’s perceived creditworthiness.
The agreement was later finalised, although the lender extracted a heavy price in the form of steep interest rates that could eat into Superdry’s profitability. But with the overhanging risk of losing its borrowing capacity removed, the Superdry share price rose dramatically. Despite that, I still think it looks very undervalued today.
Long-term potential
Over the past five years, the shares remain deeply in the red. They have lost over 90% of their value. That is a dismal record.
What interests me about the price movements is why Superdry was ever valued so highly in the first place. Past performance is not a guide to what will happen in future. Still, at some point in fairly recent memory, investors saw Superdry as a compelling proposition with a very valuable business. What happened?
Negative perceptions
The company changed management and investors felt it risked losing its cool, youth-driven cachet. For a fashion brand marketing a certain lifestyle, that can be fatal.
But here is the thing. In 2017, revenue was £752m. For the company’s most recent financial year it was £610m. So while revenues have fallen over those five years, the decline was 19%. That is substantial, but much smaller than the decline in the Superdry share price over a similar timeframe.
It is at the profit level that things shrunk more dramatically. Basic earnings per share of 81.2p in 2017 fell to 27.7p last year, a dip of over 60%.
Last year’s sales were still substantial and the company is in growth mode, with a 3.6% increase for the first half of the current financial year. So I feel worries about the brand losing its customer appeal have been overstated.
What clearly does need work though, is the firm’s profitability. Risks like inflation could continue to hurt margins.
Potential bargain
Present management seems to be working to get the company back on track, as shown by the growing sales. Meanwhile, although last year’s per share earnings were sharply lower than five years before, they were still sizeable.
The current Superdry share price means the company trades on a price-to-earnings ratio of less than 6. If profitability improves, that ratio could be even more attractive moving forward.
That seems like excellent value to me. With spare cash, I would consider jumping on the current price to add more Superdry shares to my portfolio.
