Superdry (LON:SDRY) was the latest UK clothing retailer to report a profit warning today coming almost a week after ladies retailer Quiz. One of the more successful brands over the past 10 years, it gave the hot summer and adverse currency exchange rates as reasons as it warned that this years profits will be hit. For a warning, the stock market share price reaction was rather benign:
Shares declined 20% in the first hour of trading before regaining some ground. There are possibly several reasons for this: the first being that the last week has seen a big sell off in equities in general, and Superdry is no exception. The company Superdry is not a recent IPO or a growth story, although alarmingly it has seen its share price more than half in this calendar year. Because of this it was already trading on a conservative valuation, indicating that this might have been expected.
Superdry has been a rapid success in the past decade. It traded as a niche clothes retailer for much of its life, but starting in the mid-2000s it began expanding rapidly. In retrospect, this was perfectly timed, as its distinctive branding being heavily Japanese-inspired gave it the illusion of being an overseas brand, something that they did nothing to play down.
Worldwide there are over 500 stores and concessions as the company has tried to remain at the forefront of UK fashion in an increasingly competitive marketplace.
The warning came in a morning RNS, and helpfully there was quantification of their effects.
Firstly, the summer and autumn to date has seen unseasonably hot weather conditions in the UK, Continental Europe and on the East Coast of the USA. Critically, these conditions have continued through into September and the first half of October and have significantly affected demand for autumn/winter product, particularly sweats and jackets, which account for around 45% of Superdry’s annual sales. The effect of the weather conditions experienced in the first half of the financial year, when combined with the well-publicised challenges facing some of Superdry’s trading partners, is expected to adversely impact profits for financial year 2019 by around £10m.
Secondly, historic foreign exchange hedging mechanisms that Superdry had put in place have not provided the same degree of protection as expected. This will lead to around £8m in additional foreign exchange costs, split evenly over the financial year.
There was also good news mixed in with this with projections mainly positive:
In terms of the expected first-half sales outturn, the Company currently expects to report:
· Mid-single digit global brand revenue growth;
· Low to mid-single digit statutory revenue growth;
· Mid-single digit Ecommerce revenue growth with owned sites expected to deliver low-teens digit revenue growth;
· High-single digit Wholesale revenue growth with full-year revenue growth also expected to be high-single digit; and
· Low-single digit owned store revenue decline.
The lost £18m does not seem to offset these increases, however. As the company notes, 75% of revenues are weighted towards the second half (which is where most warm clothing is sold). A previous analyst estimate for profits this year came in at £86.7m, so this is a fair miss.
As a business, Superdry have been a big success story in the past. Consistently profitable over the last decade, profit before tax for the last year was £66.3m, which compared to other brands such as French Connection and Ted Baker has provided much greater value for shareholders.
The company has also maintained high cash balances and carries no debt. Their designs are unique, if not iconic, and the brand enjoys a slight premium proposition, with an increasing outlook on value for money. They have pledged to become a ‘global digital brand’, which just seems a buzzword for a brand that transcends countries via social media – and there are plenty of these out there.
One question about many clothes retailers is whether the business environment will continue to be kind. Reduced footfall seems to be the case for most, which harms retail-heavy operations which have a high level of costs. Increased competition is also a factor, which is reflected in Superdry’s accounts. Although profits have been increasing, one metric that has declined steadily is the operating margin, as overall selling prices have declined.
This is part is due to increased competition. There is nothing proprietary about Japanese characters, and neither can copyrights be enforced. There have been several players who have tried a similar play, from entire brands (Tokyo Laundry) to giants such as Primark offering pieces. That said, the brand is in a decent place, easily leveraged to cover the leisurewear and sports leisurewear segments. Perhaps the most specific Japanese-style challenger is Uniqlo, although the two have not truly collided, offering slightly different products.
An excerpt from the accounts shows the change in the business:
UK revenues have stayed almost flat, whereas Europe and the Rest of the World have seen rapid growth. It is not too hard to imagine that market saturation might have already arrived in the UK, and growth elsewhere may be easier to attain.
The business is in a good place at present. The cash positions is good, it has markets where it is able to grow, and the balance sheet is also in fine shape, with not a huge amount of intangibles. Growth here has been managed well from a shareholders point of view, with no dilution of shares, acquisition of debt.
Superdry’s share price is at a near 4 year low, and there must be plenty of bruised holders out there, as at the start of the year the share price exceeded £20. Dividends per share totalled 31.2p in the past year, and this seems to be a sustainable cost, which is covered over twice by earnings.
The question is whether we believe the warnings are due to temporary or more permanent factors, and what you think of the brand. I am inclined to not to take less notice of the exchange rates, as in another year the company may well benefit from favourable swings. However, an £8m swing is rather large, and in the current environment this may come under more scrutiny.
The warm weather factor is easily verifiable, but most of the company’s sales take place outside of the UK nowadays. Isn’t a hot summer commonplace nowadays? I don’t seem to remember the last time there was an unseasonably cold summer. An arguably, this might have been balanced out by the unseasonably cold winter that we had, which should have been a major boost to Superdry.
In any case, having much of its stock in coats and jumpers seems a bit unnecessary. If it aspires to be a global brand, then the balance should be far better with respect to other garments. In Asia especially, it would seem quite difficult to be selling any warm clothes at all.
Perhaps the biggest risk in the room is whether Superdry may become a victim of its own success and go out of fashion in the medium term. It is fair to say that the brand has not changed too much since the expansion which gave it success. Ten years ago, this had a more unique position in the marketplace, nowadays most competitors offer something broadly similar. Even subtle changes in consumer tastes are easily catered for by the bigger chains.
It would be difficult to argue that Superdry is not the edgy brand it once was, and whilst its Ebay store could be described as a success (adding an additional ‘channel’), the net effect would be to cannibalise sales from its shops, and margins as well because the prices online are at discount.
It’s proposition means that it seems very difficult to change its course. It seems hard to imagine it moving away from the Japanese influence, nor would it be easy to crack super-premium or more formal-wear markets. It’s new store in Berlin has struggled, perhaps reflecting that in these changing times it is rather difficult to really monetise very large stores, or profitably incorporate experiences into them.
However, all this comes on the back of a much decreased valuation for the company. There could be an argument that the decline could be longer-term and terminal but I have some confidence that the company has the resources to keep itself competitive. 4/5.