According to multinational broker Berenberg, two of our high street retailers, Supergroup (LSE: SPG) and Debenhams (LSE: DEB), have very different outlooks. Thanks to consistently strong performance, it regards the former as “undervalued” while believing the latter’s market share is under threat. I completely agree.
Based on the company’s last set of interim results, Berenberg’s bullish call on Supergroup makes a whole lot of sense.
For the 26 weeks to the end of October, total revenue rose just over 31% to £334m with retail sales climbing 25% and wholesale revenue jumping by 43.8%. This led the company to declare an 8.8% rise in pre-tax profits to £21m.
Supergroup also performed particularly well over the 10-week peak trading period from November through to January with retail revenues rising 20.6% year-on-year to £162m.
While it must be highlighted that favourable currency movements have been responsible for approximately one-third of revenue growth, it’s also hard to deny that the Cheltenham-based company’s expansion programme is paying off in spades. With new stores (owned and franchised) opening at a furious rate and good progress being made overseas — particularly in North America and China — Supergroup is fast making its goal of becoming a “global lifestyle brand” a reality.
Shares in the company have rarely been cheap but right now, they trade on a price-to-earnings (P/E) of 16. For a company with strong growth prospects, that looks very reasonable to me.
While Supergroup’s shares are going in the right direction, the same can’t be said for its neighbour Debenhams. Go back almost 11 years and the company’s stock was changing hands for 196p. These days, its can be yours for just 53p. Fashion trends may come and go but — these days — retailers rarely get a second chance.
Perhaps I’m being overly harsh. After all, January’s update made reference to adequate trading over the previous 18 weeks with group like-for-like sales rising 3.5% (0.5% in constant currency). Like Supergroup, Debenhams also fared well over its key seven-week Christmas period with like-for-like sales rising 5% and online sales up an encouraging 17%.
All this might suggest that Debenhams has been unfairly treated by the market. Indeed, when compared with the doom-laden update released by FTSE 100 constituent Next at the start of 2017, this kind of performance deserves credit.
Trading on just eight times earnings, shares in the company also look screamingly cheap. One could reasonably suggest that Debenhams only needs to show evidence of a slight improvement in its fortunes for sentiment to return. This could come as early as April when half-year results are announced.
Trouble is, I’m still struggling to get a grip on Debenhams’ identity and who might be attracted through its doors. Teenagers and young adults? Forget it. The more mature consumer? Possibly. Then again, what do its stores offer that others don’t? At least Marks & Spencer can rely on its hugely popular food offering to deliver profits even when its clothing range fails to inspire. To my eyes, there’s nothing in Debenhams you couldn’t purchase elsewhere and likely cheaper. That’s not an enviable position.
With Theresa May close to triggering Article 50 and the possibility of many consumers becoming even more cost-conscious as a result, I think there are too many question marks hanging over Debenhams to make it an attractive investment over the short-to-medium term. It’s a sell for me.
Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Supergroup. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.