Superdry (LSE: SDRY) shares used to be one of the most sought-after investments on the London Stock Exchange. That came to an end in 2018. The value of the stock peaked at £20.78 in January 2018. Since then it has fallen more than 90%.
Recently however, investor sentiment towards the business has begun to improve. Over the past six months, Superdry shares have added 70%.
I think this could be just the start of a much bigger recovery for the stock. As such, I’m planning to add the investment to my ISA.
Superdry shares on offer
The fashion company has been in the doldrums for two years. Unlike many other retailers, which entered 2020 on a high, Superdry was struggling even before the pandemic. The group’s losses totalled £99m in fiscal 2019. Losses hit a further £143m in 2020.
The good news is, City analysts expect the company’s fortunes to improve this year. Losses are projected to shrink to £31m. That’s not great, but it will be the lowest loss figure in three years. The group is then expected to return to profit in 2022.
Of course, these are just forecasts, and there’s no guarantee Superdry will return to profit next year. However, I think they show the company’s potential. Indeed, even though the business has been losing money, it turned over £700m in 2020. This suggests consumers are still happy to buy the brand.
What’s more, at the end of its fiscal first half, the company reported net cash on its balance sheet of £34m. I think this gives the business plenty of flexibility and, more importantly, time to instigate a turnaround.
Turnaround in progress
The turnaround already seems to me to be taking shape. While overall sales plunged 23.4% in the six months to 24 October 2020, online sales jumped 49.8%. E-sales now account for more than 50% of retail revenues. The figure was around 27% before the pandemic.
I reckon these numbers suggest Superdry can survive the current storm. With a more significant digital business, it may even emerge stronger on the other side.
This could be incredibly positive for Superdry shares. It’s impossible to predict how profitable the company could ultimately become, but between 2015 and 2018, the organisation reported an average annual net income of £51m.
If it returns to this level of profitability, the company looks cheap. Its current market capitalisation stands at £212m.
Risks and challenges
This is only a rough guide. The retail industry is incredibly competitive, and there’s no guarantee Superdry’s sales and profits will ever return to historic levels. The company may never return to its former glory. Further, the group still has a large brick-and-mortar store base.
With the retail sector allowed to open from 12 April, these stores may start to earn their keep. However, the challenges facing physical stores have been well documented. There’s also no guarantee stores will be allowed to stay open (should a Lockdown 4 be required), or if this is the last time they’ll be forced to close.
Therefore, while Superdry shares do look attractive based on their growth potential, the company faces many risks. This isn’t an investment for the faint-hearted. Nevertheless, as I’m comfortable with the level of risk involved, I’d buy the stock for my ISA today.
