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Here’s why I’m sticking with this struggling growth stock

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Distinguishing compellingly-priced stocks from value traps in the retail sector isn’t easy at the current time. One company I have chosen to invest in, however, is battered fashion retailer Superdry (LSE: SDRY).

Following an awful 2018 and a spate of profit warnings, the return of founder and major shareholder Julian Dunkerton as interim CEO coupled with a cheap valuation and relatively strong finances, led me to believe the retailer could be a great contrarian bet

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Having said this, there’s certainly no point denying that anyone holding the stock must be willing to endure the potential for even more pain in the short term. 

“A year of reset”

Let’s not beat around the bush. Today’s full-year numbers were pretty awful.

Following a “poor performance in the second half across all channels,” total revenue for the year to 27 April was flat on the previous year at almost £872m, with gross margin falling 2.5% to 55.6%.

Underlying pre-tax profit came in at £41.9m — a near 57% reduction on the £97m achieved in the previous year as a result of extensive discounting at its stores.

On a statutory basis (taking into account non-cash onerous leases and impairment charges of almost £130m), a pre-tax loss of £85.4m was recorded, compared to £65.3m of profit the year before. 

To make matters worse, the company also elected to slash the final dividend by a little under 90%, from 21.3p to just 2.2p per share, leaving a total payout of 11.5p per share and a trailing yield of 2.7%.

And if that’s not bad enough, the next financial year looks like it will be equally tough for the business. Taking wobbly consumer sentiment and the need to “rectify” its product range into account, Superdry’s management now regards FY20 “as a year of reset.”

While new initiatives have yielded “small positive results,” revenue is expected to show a “slight decline” in the new financial year and particularly in the first six months as management continues to address the problems created by Superdry’s previous board. Increased spend in areas such as marketing are also likely to offset cost savings made elsewhere. 

If you ask me, a lot of this is already priced in. Based on the sharp recovery in Superdry’s share price after this morning’s initial sell-off, it would seem others agree.

Good value

Superdry’s stock was trading on a forecast price to earnings (P/E) ratio of just 9 before markets opened this morning. Although there’s likely to be a degree of adjustment to analyst expectations in response to the subdued outlook statement, I still think the shares offer value, particularly as the company’s finances continue to look in far better shape compared to other retailers (net cash position of £35.9m). 

In addition to this, it’s clearly far too early to judge whether Superdry’s new management team will be able to achieve its goal of stabilising the company and returning it to growth. As Dunkerton remarked this morning, current issues “will not be resolved overnight.

As such, I’ve decided to retain my (small) position in Superdry with the expectation the share price is likely to remain under the cosh for the rest of 2019 (and probably most of 2020).

If and when Dunkerton’s turnaround plan shows any indication of working, however, I think those investing at these levels could be richly rewarded. 

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Paul Summers owns shares in Superdry. The Motley Fool UK has recommended Superdry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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