Small Cap Value Report (Weds 12 Dec 2018) - SDRY, FTC, DPP, FUL

12th Dec '18 by Paul Scott

48 comments 10971 reads

Good morning, it's Paul here.

What fresh horrors has the market served up for us today? It looks like at least 3 profit warnings, judging from the top % fallers list, so I'll start with them.

Superdry (LON:SDRY)

Share price: 380p (down 33.7% today, at 09:10)
No. shares: 82.0m
Market cap: £311.6m

Half year report

Interim results for the 26 weeks ended 27 Oct 2018.

Good grief, I didn't expect this fashion brand to come back within my small cap remit again - its market cap was over £1.6bn at the start of this year, and is now just over £300m. I know this share is popular with private investors, so my commiserations to any readers who are holding this one.

The share price is all over the place, it's up 22p to 402p just in the time I wrote the above.

I reported on the profit warning in Oct 2018 here, fearing that it had another profit warning to come.

Note that Superdry has a profit seasonality leaning towards H2. So the H1 numbers need to be seen in that context.

The highlights today look grim, with profit down by almost half;

Although it's interesting to see that the dividend has been held.

Current trading & outlook

Unseasonably warm weather has continued through November and into December (Superdry's two biggest trading months in the year) across all of our key markets. Given Superdry's reliance on cold weather related product continues and a lack of innovation in some of its core categories, sales have remained under pressure despite a strong performance in the Black Friday week. This has resulted in an adverse profit impact of around £11m in November and the Company expects a potentially similar profit impact in December if trading conditions do not improve.

There is still considerable uncertainty in terms of the weather outlook, the changing shape of consumer behaviour in the peak trading period and the impact of wider economic and political uncertainty. Reflecting those impacts and the uncertainty in the remainder of the financial year the Company expects underlying profit before tax to be in the range of £55m to £70m.

It's very helpful when companies give specific profit guidance like this. My initial reaction is…

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gbjbaanb

12th Dec '18

The 18-30 demographic was heavily Not voting, so you'd think they didn't give a monkeys either way (unless the next referendum is held on an island or jungle....) but as everyone has said the brand is now with the more "gammon" of purchasers, then the pro-EU aspect is likely to have deterred exactly the wrong people here.

but I think Dunkerton is right (not on the ref, obviously) in that current management are just not doing things right. Simple as that.

timarr

The 18-30 demographic was heavily Not voting, so you'd think they didn't give a monkeys either way

The post-referendum analysis now suggests 64% of registered under 24's voted and 75% of those voted Remain. That's in contrast to the initial analysis that suggested only a third of young people voted.

Obviously no one's allowed to know exactly who voted or how so this is all statistical analysis - but so were the initial figures. And the updated numbers do make more sense in the context of the overall voting numbers than the original figures. It's also directly in line with the estimated youth voting figures in the last General Election.

However, given that 70% of Superdry's revenues are generated outside the UK it seems unlikely that their founder's pro-Remain proclivity has much to do with their woeful performance. More likely it's just that their clothes are crap ...

roddy10

One of the issues with Superdry appears to be the weather (first sentence in the prose of the RNS today and last page of the presentation). The following suggests the weather is about to turn - https://www.express.co.uk/news/weather/1057730/BBC-Weather-forecast-UK-snow-Met-Office-snow-warning-BBC-Carol-Kirkwood

I am wondering if that will impact Superdry sales?

Secondly it is worth noting that the stock is now trading at a discount to its tangible book value - this might entice some value investors.

Thirdly I think I need a stiff gin to wipe out my vision of Paul after reading:

' Although does the public really need to buy a new coat every winter? I'm still wearing an old £8 gilet from Primark, and it does a perfectly satisfactory job.'

herbie47

"The post-referendum analysis now suggests 64% of registered under 24's voted."

I think the key word is registered, what is the proportion of under 24s that were registered? I know before the last election they was a surge in registrations just before. Most seem to have voted Labour.

mmarkkj777

Hi Tamar,

I don't think Superdry clothes are crap (they are actually, relatively good quality (IMO). Its just that they went ex-cool a while ago and the high/repeat spending youngsters are just not buying the brand anymore.

Also the weather is just an excuse from management. The last few winters have been cold enough to buy a coat. Even if this winter was exceptionally cold, would the youths then go out and buy a Superdry coat?? Don't think so. The kids are far more fashion sensitive than temperature (or Brexit) sensitive.

I still think today was probably an over-correction and they are undervalued. I'll be watching tomorrow for a short term bounce-back to trade on (after it hits the bottom). Not a buy and hold though unless the company gets shaken up. Even then, not sure how they can recapture the Brand strength!

runthejoules

Last time I was in a London Franco Manca it was full of the real Italians and my gf and I both enjoyed the good-value vegan pizza. It filled up as the evening went on. I hold... should have bought more! :-)

portugull

I cannot find Paul's Report on Photo Me.
I would be very interested in your opinion Paul.

JohnEustace

I just got a email from Superdry offering 20% off everything with the code XMAS. Looks like they have stock they need to shift.

lemonjar

Yeah for me an issue is how the brand slaps SUPERDRY in big letters all over its gear. That maybe works for you when you're new n hip, but not so good when the fashion tide turns. I think it makes them particularly susceptible to the crowds following the crowds to some other next thing (esp when god forbid "parents" start to wear the stuff)

jamesalastair

I do not often post on Stocko ....but you seriously invest on the basis of the political views of the founder / major shareholders. I am truly glad you do not manage my money.

My kids are still buying and wearing Superdry in school .....but then I teach in a Highland school among the mountains and lochs and we have still to catch up with the rest of the country.

Mark Stabler

There are a few interesting points about Superdry but most of them are dated and reflect on the past when the tee shirts, hoodies and parka jackets that they are famous for where designed and introduced by Julian Dunkerton & James Holder that was a fantastic start to the Superdry brand but its not the end of the story and a new team and ideas are required to move the company forward. The fastest growing categorises in fashion are ladies and children's ware and ladies buy most of the clothes for their boyfriends, husbands and kids so they are the most important people that Superdry need to impress and influence along with the next generation of kids coming through. Remember most guys will wear a tee shirt until its falling off their backs and a parka jacket for even longer (just like Paul) but that is not the same for the ladies and certainly not their kids because they grow out of their clothes every year! I think that Superdry is in better hands now that Julian Dunkerton has moved on.
I am just an humble investor who has purchased Superdry shares yesterday and twice today (and if they go down again i will buy tomorrow as well) my guess is that there is a very long way to go for this super brand but of course i do hope there are a few people out there who also see it my way. if you would like to know more about Superdry check out their website and the Supergroup corporate website, there is a great presentation video added today.
You only need to watch the first 60 mins to understand where the business is going, not a lot of time if you are thinking about investing in this company (I would not bother with the last 30 mins of question time just make up your own mind).

nicobos

13th Dec '18

A quick comment on Superdry (LON:SDRY).

If it’s just the weather, how come Canada Goose $GOOS are doing so well ? Their main products are ridiculously expensive and warm down filled jackets for anyone that doesn’t know. Quite different quality to paul’s Primarni puffer!

The answer is fashion and fad. Superdry (LON:SDRY) is now naff. I’m a dad and quite like their products which says it all !

Once you lose the ‘cool’ factor, it’s not easy to get your mojo back.

My worry would be that this could be the next Crocs $CROX .

Don’t catch a falling knife. Wait until the chart bottoms and profit turns a corner before getting in.

You may miss out on some of the early gains but this can still go a lot lower first with continued selling pressure and large overhead resistance.

Hi Nicobos, Did you watch the video?
Your right its about Crocs they only sold Crocs! Superdry's existing performance is about their existing range, the weather an the economic conditions that we have their future is nothing to do with any of these factors...and if you are a dad wearing Superdry sorry you are naff.

-4

Hi Mark,

Sorry, I don't agree with your statement:

"Superdry's existing performance is about their existing range, the weather an the economic conditions"

I think its simply that they are not a cool brand anymore. They can change the range, the weather can go positively Artic, but the 17-25 demographic won't wear the stuff (even if, or especially if, their mums want to buy it for them). I think they are now a bit undervalued, but not a long term proposition unless the brand recovers. Just my opinion (as a new holder, today, and an ex-holder, 2 years ago).

mojomogoz

I don't have an organised view on Superdry (LON:SDRY). But lemonjar's comment resonates for me as a shopper. I always objected to the excessive labelling so never checked out their gear. Whilst the label is cool all that messy labelling drives higher margin. My casual observation is that the wearers of Superdry in UK have become increasingly naffer looking (its a bit chav at times)...and the cooler youngsters ain't wearing it. My children's wannabe 'roadman' friends wouldn't be seen dead in some Superdry. Some labels okay (particularly sport or some higher value stuff) but so is non-branded or lowly branded stuff from many outlets (Gap, Uniqlo, even Next).

Superdry makes me think of Next (LON:NXT) when I was a kid in the 80s (in Aberdeen, now I'm London so maybe there's a geographical dissonance in this comment) and Next seemed quite cool and fresh and a label you wanted. But it soon became just a better Marks and Spencer (LON:MKS) - make sense?

It strikes me that Superdry in the same transition phase from a UK perspective...but they haven't built the breadth of a Next, Gap or Uniqlo.

From UK perspective and not much expertise in the company it strikes me that Superdry may need a turnaround and brand reposition...probably to something more utilitarian like the other labels above. That reduces margin and means they are running a lot of expensive retail outlets with lower margin and a struggle to become a more volume player.

I have no insight on the bigger overseas operation. A lot depends on how separate the UK v overseas is. Travelling around Europe and Asia I see a tendency for youngster to wear stuff that is more covered in messy labelling than is the case in the UK (naff, dodgy and unscientific observation!). So perhaps its a brand more suited to overseas?

The above is as much speculation as analysis as not expert in this stock....but I've persuaded myself that I will read up a bit on the stock but with a bias that they are likely to go through more pain and reorganisation that will likely depress sentiment and price for longer. Something interesting may arise but could be a fail too.

The comment about Brexit and SuperDry is interesting because of the disconnect it implies. I believe that (to simplify) the young voted to remain whilst the old voted to leave. Hence if anything the founder's donation would enhance the brand value of SuperDry with its core market.

I think a more fundamental question is whether 'professional management' enhances a business when it takes over from a founder or not. We can argue about asset turnover and capital ratios - but fundamentally a brand needs to connect with its consumers. I would argue that a variety of businesses have suffered the 'benefits' of professional managers over time.

Is SuperDry broken? I would disagree. Rather it may be a misunderstanding by new management that it was a seasonal business - whilst spreadsheets and investors demand a stable business with certainity.

The focus on shrinking SKUs _might_ be justified. However part of the management presentations appear to benchmark the SKUs vs other retailers. This in itself seems to me to be part of the problem. Are you trying to be as mundane as competitors or different?

Why are they not benchmarking to Inditex (Zara) or BooHoo? The latter is particularly pertinent given that the new SuperDry management wants to be a 'digital first' company.

This brings us to the nub of the issue - is there a problem with SuperDry or is there a problem with the management? In particular I am wondering if the CEO's background (Co-op, Kingfisher (/Screwfix / B&Q), Matalan, Boots and Dixons is entirely relevant and pertinent).

May I point you all to the company presentations at https://corporate.superdry.com/investors/results-and-presentations/ , in particular yesterday's presentation at https://corporate.superdry.com/media/2545/fy19-interim-results.pdf

To me some of the presentation appears to be straight out of MBA school eg 'brand development', 'fundamental product repositioning', 'transformation programme', 'cost review'.

Looking at some of the product comments (eg 'Wincheater - legacy products kept in range for too long' on slide 18 yesterday) I wonder if management has alienated the core franchise and is also missing the differentation / brand values of the co. --- ie the Windcheater was and still is a differentiated product in terms of price point and availability. Some of the new products (eg the 'Jared' on the same slide) appears to me to be more appealing to 'chavs' (apologies for stereotyping) and may actually alienate the core clientele.

Management also seems to be focused on short term sales rather than the lifetime value of the sale - eg on slide 23 --- I would suggest as an investor that a lot of those products (eg the 'limited edition' or the 'fresh colour palette' hoodie) may be a one season product and you risk end of season stock issues.

The move into snow / sport appears to me to be a rationale move into an 'adjoining adjacency'. However I am 'bemused' that a management that is claiming the 'wrong kind of weather' is increasing its winter snow bet!

I have some concerns that the wholesale strategy may be cannabalising the owned stores.

On slide 35 the management discuss Far East sourcing. This reeks to me of a management that lacks clothing expertise. Both Boohoo and Zara have built their model on 'fast fashion' based on nearshoring - as the flexibility more than offsets the cost advantage. (Compare the performance of Zara and H&M vs M&S).

Slide 40 - the jacket the model is wearing is interesting. One of the key differentiations of SuperDry is the triple zips....so if you lose them what is your differentiation. Also after the discussion in the slides re reducing the logos it is interesting to note that the jacket has logos - just in different places.

Despite all the above though it seems to me that the discount to tangible book value makes this an interesting stock.

One of the main problems that i see for Superdry are their store size in the UK they are generally to large and they have learnt by this mistake and its going to be corrected as their leases come up for review and their growth comes more from overseas and via Wholesale, Ecommerce and at a lower level from their owned stores.
Its clear that currently they have problems but there is nothing that can't be improved so i still see great future potential...but clearly others will have a different view and if they are buyers or sellers their views will be reflected in the share price.

Disco Ball

Sharw

You'll be glad to hear I own retail shops and an online business now. Financial advising and RNSs are far too boring.

Small Cap Value Report (Weds 12 Dec 2018) - SDRY, FTC, DPP, FUL

Superdry (LON:SDRY)

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Paul Scott

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