Supergroup — Supercharged

Supergroup — Supercharged

A reassuring trading update confirms that SuperGroup continues to deliver attractive top-line growth. Admittedly, the superior wholesale performance means (as previously flagged by the company) that there is likely to be some gross margin erosion, but the focus on operational leverage should still ensure a modest improvement in operating margins going forward. Management’s commercial and pragmatic approach to expansion should mean continued success as the brand rolls out beyond its core markets of the UK and continental Europe.

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Written by

Richard Jones

SuperGroup

Supercharged

Consumer

QuickView

10 November 2017

Price

1,841p

Market cap

£1,502m

Share price graph

Share details

Code

SGP

Listing

LSE

Shares in issue

81.58

Business description

SuperGroup trades globally through the Superdry brand, a lifestyle brand that targets a relatively young (teenage upwards), fashion-aware customer. Retail represents 60% of sales (25% of this is digital) and wholesale 40%. The UK and Europe account for c 85% of sales.

Bull

Clear brand positioning; strong brand momentum and digital performance.

Opportunity to grow in the US and Asia.

Track record of strong cash generation.

Bear

Gross margin under pressure from shift in channel mix and raw material inflation.

Q2 decline in like-for-like sales growth at owned stores is concerning.

Risk of founder selling down.

Analysts

Richard Lewis Jones

+44 (0)20 3077 57 00

Paul Hickman

+44 (0)20 3077 57 00

A reassuring trading update confirms that SuperGroup continues to deliver attractive top-line growth. Admittedly, the superior wholesale performance means (as previously flagged by the company) that there is likely to be some gross margin erosion, but the focus on operational leverage should still ensure a modest improvement in operating margins going forward. Management’s commercial and pragmatic approach to expansion should mean continued success as the brand rolls out beyond its core markets of the UK and continental Europe.

Solid trading update

Although only revenue is reported at this stage (full interims will be published in January), the company’s message is that it is on track to meet half and full year profit expectations. The company reported revenue growth of 20.4% (17% at constant FX) to £402m. Retail revenue grew 12.8% and wholesale revenue was up an impressive 34% (there was some benefit from early deliveries here, which will probably be reversed in H2). The negative news is that like-for-like retail sales growth has slipped from 9.3% in Q1 to 3.7% in Q2. However, it is worth noting that Q1 was disproportionately flattered by FX translation and that the company is sticking with existing profit guidance, which would imply that it is not seeing any material deterioration. Brand momentum remains strong and this is clearly encouraging new and existing franchise and wholesale partners to invest in it.

Focus on operational leverage

Despite the expected 170bp decline in the gross margin (arising from the channel mix shift to wholesale as well as raw material cost inflation), management is still expecting modest improvement at the operating profit level and has maintained H1 PBT guidance of £25-26m. This is largely due to the company’s focus on efficiency gains, both at the front end (eg increasing store productivity through staff rota changes and enabling seamless online/offline stock movement in Europe) and at the back end (eg improved distribution centres and new order management system for e-commerce).

Valuation

We believe that significant changes to consensus estimates are unlikely. The shares have performed strongly in recent weeks and now trade on a prospective P/E of 19.3x. Although this may seem a little stretched we would point out that the company is growing at a superior rate to the market and to other apparel retailers. We suggest that the combination of superior earnings growth and strong balance sheet (net cash of £65m at end FY17) remains compelling.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

04/17

752

87.0

84.5

28.0

21.8

1.5

04/18

865

98.8

95.3

32.1

19.3

1.7

04/19e

976

115.1

109.8

37.7

16.8

2.0

04/20e

1087

131.6

124.2

43.6

14.8

2.4

Source: Bloomberg

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

Disclaimer

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2017]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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