Stock to Watch: Supergroup

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

The FTSE 250 shares in youth fashion group Supergroup (SGP) have been a terrific rollercoaster since listing at 500p in March 2010 - soaring above 1,800p in early 2011 then suffering a slump to 435p by last November.

The price is currently attracting recovery buyers over 650p, now management has got to grips with a warehouse systems snag that was a main cause of the low. Are the shares now in a firm recovery trend or was this a hard lesson to investors about how fickle a fast-growing fashion group can be?

The recession-defying performance of ASOS (ASC), a fashion group which sports a forward price-earnings (P/E) multiple of about 35 times, has likely figured closely in investors' hopes. SGP is at an earlier stage however, in establishing a growth record as a listed company, so when high expectations coincided with management error last year, an exit of hot money and share price crash was inevitable.

The initial aspect of SGP's fall last year was over-valuation relative to worsening economic risks. The company had reported no deterioration but at an £18+ peak the P/E multiple was over 35 times and ASC also de-rated from highs during the second half of 2011.

What accentuated SGP's fall was a 5 October update citing "short-term issues" in the transition to a warehouse management systems upgrade - causing a significant reduction in stock reaching its UK stores, which represented about three-quarters of group revenue in the financial year to end-March 2011. The hit to 2011/12 pre-tax profit forecasts was estimated at £6 to £9 million in context of about £60 million profit, since revised to £9.8 million.

Interims to end-October were a mixed bag, the question being whether the warehousing issue can explain modest like-for-like sales growth. Total revenue soared 51% as a result of strong international growth within wholesale, with retail registering 34% growth to £73.1 million. But like-for-like retail sales growth of 4% barely matched inflation and within a jumbled income statement the underlying pre-tax profit was quite flat at £13.0 million.

End of last year, the stockmarket was unconvinced the systems' snag could explain modest like-for-like progress. For example, Numis altered its stance from 'buy' to 'sell' in November after this broker alleged from online searches, rapidly slowing popularity for Superdry, the company's principal fashion brand "sold in 85 countries".

Since the P/E multiple had fallen so far and (assuming broker forecasts published in Company REFS) may still be about 12 times 2011/12 year projections, falling near 10 for 2012/13, the price-to-value comparison became interesting enough to spur some share price recovery - which has scope to continue, according to trading updates.

While the prospective yield is a tad over 2% compared with just over 0.5% for ASC, both these shares are essentially a tussle over capital gain versus loss. ASC has the more proven record while SGP has the more attractive rating - but only if management can prove doubters wrong.

In a New Year's market that has been more risk-tolerant, SGP shares have risen from about 500p backed by an 11 January Christmas trading statement citing total group sales up 22% and total retail sales up 28%, although the like-for-like comparison on retail sales was 5.8%. The disparity is said to be due to the pace of new store openings, targeted to reach 50 altogether for the current financial year - in a context of 72 Superdry and Cult stores in the UK, over 100 Superdry outlets in various locations overseas, predominantly franchised, about 2,000 wholesaler relations and a website.

So at the current pace of store openings, it is possible to report impressive overall growth rates. The warehousing control issue probably reflected too-hasty growth.

Ambition similarly characterises the opening of a Regent Street store - or one floor of which, currently - at a cost thought to be around £12 million, acquiring the lease from Austin Reed. The full opening should happen this springtime and it remains to be seen if this and the rent involved prove justified payment to enhance the Superdry brand.

The next clue to performance will be an interim management statement covering the 13 weeks from end-October to 29 January, to be announced on 8 February. It is possible this reflects the general slide in UK consumer spending being reported since Christmas, so I wouldn't put too much emphasis on this - a disappointing January could indeed present a long-term buying opportunity.

Falling cotton prices should also help margins and Supergroup continues to diversify from austerity-hit, young UK consumers, with a targeted 50 franchised stores opened in the next financial year, also two wholly-owned outlets on the Continent.

Yet the crux for long-term investors is far less the hiccup over warehousing or price-earnings comparisons, than how sustainably successful the Superdry brand proves. Launched in 2003, it has become epitome youth-wear - jackets, jeans, t-shirts, hoodies etc - fusing vintage Americana fabrics with pseudo-Japanese text.

You cannot predict fashion, just go with its ebb and flow, but now SPG has had the froth wiped off its share rating it is more interesting to follow. The shares have potential to do very well from 700p+ so the current rise is not much of a handicap.

The end-October balance sheet had virtually no borrowings and a ratio of current assets to current liabilities of 2.2 times. Of £16.7 million net assets, intangibles represented £43.6 million - so net tangible assets per share were just over 150p a share. However the real issue for asset-backing in a share like this is potential longevity of key brands.

Now that various brokers have turned cautious, "once bitten, twice shy" after last year's recommendations, the de-rating and resilient performance reported so far since makes SGP an interesting share to be following.

For more information see supergroup.co.uk and for more Stocks to Watch, visit Edmond's archive.