Bad news for shareholders of Superdry (LON:SDRY), as today’s half year report further re-iterates the bad news that the unseasonably hot weather has continued, which has resulted in a large decrease of profits for the current year. I wrote about Superdry back in October on its initial profit warning but it appears the market dislikes this warning more than the first, and the shares have been marked down by a further third:
The decline here has been incredible, not helped by the increased uncertainty in the markets at the moment. Prior to October’s profit warning, the share was over £10, and it had a year high in excess of £20 In other words, in the space of less than a year, the value of Superdry is a mere fraction of what it was.
We don’t need to recap what the company does or much about its history, as this was covered earlier. On most metrics, the share seems to be extremely cheap. For a start, the company is still generating profits – and a lot of them relative to the market cap. The brand is recognisable at the least as a semi-premium one, albeit mature. To balance that out, it is clear that the trend for profits is down, and there seems to be little faith that this may be arrested any time soon.
The warning came in the half-year results published today. We get straight into it:
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.
No previous expectations were mentioned, but in the previous profit warning an analyst estimate forecast £86.7m, with that profit warning warning of an £18m hit in a combination of lost sales and currency exchange. This new trading update impairs profit for November and potentially December too, so a FY result could be quite poor and towards the bottom end of these expectations.
The rest of the RNS gives the some of the strategic changes that are well underway. The product range is being repositioned, new markets are being entered into (such as kids), margins are being increased by getting cheaper suppliers, licencing is being looked at to leverage the brand, marketing channels are being looked at, all on the back of a cost efficiency drive which reduces capex across the existing store estate. It is safe to say that that is quite a lot, and there are risks involved with all of these.
Today’s update gives us a chance to look at some of the latest figures:
On the whole, there is not a lot to cheer here. Retail revenue has barely moved despite an increase in space, so the like-for-like is negative. I dislike the Global Brand Revenue, which simply equalises prices by calculating all sales at high street prices. The increase of £12.5m in wholesale revenue could easily represent the entirely of the Global Brand Revenue increase.
The rest of the results are in line with expectations. Not much has changed on the balance sheet. There are a modest amount of intangibles and goodwill, which are outweighed by tangible assets such as property and inventory. The most noticeable items relate to cash – operating cashflow sees a £30.2m decrease, with net cash decreasing by £14.6m.
A look at the cashflow statement shows the reason:
The non-cash item of the financial derivative accounts for the much of the large swing. The working capital movements have been largely neutral with a reduction in both amounts owed and owing.
It should be the expectation that if most sales are for warm clothing, then sales will be weighted towards H2, and inventories will decrease and cash balances increase as the year moves on. From that point of view there does not seem to be any financial distress in the short-term. The last report mentioned that a revolving credit facility was being looked at, but with a solid asset backing this does not seem excessively risky.
Today’s picture paints a rather more difficult picture for the company than previously thought. It is fact that we have had unseasonably warm weather, but one of the nagging doubts is that Superdry’s previous gloss may be coming off. Competitive pressures are tougher than before, and with low cost producers such as Primark producing better quality goods, this threat may be here to stay.
With December 2018 (in the UK at least) being a warm month, this does not bode well for Superdry. If January is the same, it could well be that there is another profit warning to come, which would send the share price down further.
One of the key questions is this: the product offering and mix has been the same for many years now. How could this have been exposed by a few warm months in the winter? Looking at weather records, it appears we have had other mild winters, ie 2016.
However, what’s done is done, and whatever the reason Superdry need to concentrate on their recovery. Will it be easy for them to transfer their brand advantages into summer clothes or kids clothes – segments where ‘disposable’ fashion may dominate? Is it easy to forge a new position in the market, and more importantly, will customers value the new proposition? Any signs of success on these fronts would invariably see the share re-rated, as at present it is priced for decline. But these things take time – and 18 months is a rather long time horizon. Given the current weather here I would imagine that the share might be a bit of a falling knife.