Since the start of the year, there has been a 59% slide in the valuation of Superdry (LSE: SDRY). The fashion retailer’s shares are worth just 5% of what they traded for five years ago.
There has been a stream of bad news, from financing arrangements that smell of desperation to a delay in the auditors signing off the final accounts this week. But they have now been rubber-stamped and published.
So how do things look?
Resilient demand
One common criticism of the Superdry investment case is that the brand is tired and past its prime.
Yet looking at the full-year results, revenues grew 2% year-on-year. At a time of inflationary prices, a small revenue increase like that could mean actual sales volumes fell. A lower gross margin (53% versus 56% the prior year) may also suggest that the company has been discounting more.
Nonetheless, the resilient revenues suggest to me that the brand still has more traction with its customer base than some critics recognise.
The fact that the company was able to sell intellectual property rights in some Asian markets for $50m this year shows that the Superdry brand still has pull.
Financial challenges
To my mind, the big question about Superdry is not whether it still knows how to design and sell clothes people want to buy. Rather, it is about the economics of the business.
Last year, the company swung from a post-tax profit of £22m the prior year to a post-tax loss of £148m. That is close to three times its current market capitalisation.
To shore up its liquidity, the company has agreed to loan facilities that require big interest payments. It also had a rights issue this year, diluting existing shareholders.
Those actions suggest that the company is on the ropes.
Finding a way forward
Juggling all those plates will not be easy. If interest payments eat into cash flow, the company could need to shore up liquidity further. That includes a risk of further shareholder dilution.
Meanwhile, ongoing customer demand is not a given. Superdry sells a mid-market/premium product at a time when many economies are weak. Of particular concern is the performance of the company’s wholesale division. That has had a hard time. However, Superdry invited several hundred wholesale customers and buyers to an event showcasing its upcoming range. That could help create excitement — and sales.
High risks
Clearly, Superdry shares carry sizeable risks. If things go from bad to worse, the shares could ultimately hit zero.
However, I also think the shares could soar if the turnaround goes well. In that case, I would not be surprised if they pass the £1 mark again.
For that to happen, I think customer demand needs to stay high and the company needs to improve its balance sheet. It has little room for error at this stage, in my opinion.
Despite the risks, I continue to believe in the underlying story here and will hold my Superdry shares.
