Listed on the London Stock Exchange, SuperGroup PLC is the company behind the very "casual" Superdry ready-to-wear brand - despite the use of Japanese characters in its logos and communications, it is indeed British.
Like Inditex, the parent group of the Zara or Massimo Dutti brands, SuperGroup is largely owned by two founding shareholders, Julian Marc Dunkerton and James Michael Holder.
With strong growth, SuperGroup has increased its turnover by seven times since 2010. With Primark (owned by the conglomerate Associated British Foods PLC) and Next, two other successful brands, this performance illustrates the entrepreneurial know-how of the British in the ready-to-wear clothing.
Superdry markets its brands through 555 stores in 60 countries, more than Primark (320 stores), but slightly less than Next (700 stores).
A quarter of the turnover is realized on-line (a fast-growing sales channel): the brand is very active on social networks because it has a substantial marketing budget - unlike Primark, which does not advertise, and passes on the savings thus realized on its selling prices.
More than 80 new Superdry stores have been opened in recent months: the Group's strategy is therefore resolutely oriented towards expansion, especially at the international level; for the time being, the United Kingdom accounts for about one-third of sales.
The development has been fully self-financed since 2011, without raising debt or issuing shares. The management claims to amortize its own store openings in less than two years, which, if the information is true, assumes a return on investment quite spectacular.
This dynamic allows SuperGroup to defend an excellent balance sheet (possibly the best in its industry), and contrasts with the difficulties encountered by the majority of ready-to-wear brands.
In addition to digital, the originality of the business model is a mixed store portfolio: 220 points of sale are held by SuperGroup, while the remaining 335 are managed by franchisees (or licensees).
This second format is advantageous: it allows higher margins and returns on investment, in addition to outsourcing part of the operating risk. This is, for example, exactly the same model as McDonald's or Burger King.
Self-owned stores reported revenue of £ 502 million for an operating profit of £ 69 million, a margin of 13.7% (higher than H & M), while franchised and licensed business of £ 249 million for an operating profit of £ 85 million, a margin of 34% (absolutely unprecedented in general-interest ready-to-wear).
Superdry focuses on the "athleisure" segment (contraction of “athletic” and “leisure”), a positioning that the company exploits in a more casual and less technical manner than peers like Nike, Adidas or Columbia.
At the merchandising level, the strategy imitates that of Zara, with incessant releases of new models and a permanent renewal of the collections.
After conquering the UK, the brand seems to seduce more and more throughout Europe. The expansion in the United States and China has only just begun; it is therefore too early to assess the success of these new geographies.
SuperGroup posted a profit of £ 66 million in the previous year. This was fully reinvested in the business, ie in the financing of operations and the opening of new stores. The dividend of £ 36 million was deducted from cash.
The return on capital employed, that is, the earnings from the cumulative use of working capital and fixed assets - generally a good measure of a retailer's operational efficiency - is 21%.
By comparison, those of Next and Zara are at a high of 15%, but most of their growth is perhaps behind them, a fortiori in the case of Zara.
On the other hand, in spite of a spectacular increase in turnover (as we said, multiplied by seven in seven years), cash generation is laborious: cash flow from operations has "only" doubled over the same period.
This difficulty is a classic of the industry, where the real obstacle is not so much to grow, but to achieve profitable growth - that is to say authentically generating cash profits.
Indeed, the opening of new stores mobilizes significant cash resources, as the working capital requirement increases progressively (mainly to finance inventories).
As of the date of this article, the market capitalization of SuperGroup is £ 1.42 billion, a multiple of twenty-two times its profits last year. This valuation is quite unusual for a company with such strong growth.
In jargon, these situations are referred to by the acronym "GARP", for "Growth At Reasonable Price".
In the light of these factors, a binary challenge is emerging that is perfectly binary for shareholders: if the investments made in international expansion are profitable as well as in the past, and the cash generation is improving, its current price (£ 17.37) is a glaring, if not exceptional opportunity (a fortiori in an overheated market, where growing companies are trading expensively).
If, on the other hand, the brand goes out of fashion (which is known to happen ever faster than is believed) and sales decline, the group will have to deal with a large fixed cost structure - albeit partially mitigated by a business model that relies on the use of franchisees, and short-term leases for proprietary stores.
This operational leverage, which is capable of rapidly sublimating or depressing profits as a result of a (even minimal) variation in turnover, is therefore both a source of risk and an opportunity.
There is also a post-Brexit currency risk, although for the moment the pound sterling is perfectly in line with the major currencies.
Are we at the beginning of a new (and formidable) success story in ready-to-wear? Or is the embellishment on the verge of being consumed, and to put an end to the dazzling rise of the brand?
Even if the market fails to take advantage of it, the company meets all the selection criteria - growth, profitability, financial strength - and thus becomes a new position in the school135perm European Portfolio.
Article published on 10/10/2017 | 12:24