It is barely a month since I bought shares in Superdry (LSE: SDRY). But in that short period, the share price has been up, down and moving around. It rallied strongly last week because of some good news I discuss below.
I hope that could be the start of some substantial growth in the shares, which is why I currently have no plans to sell Superdry. Here is why I think they may do well in 2023.
Debt worries recede
One of the big concerns that had been dogging Superdry recently was its ability to borrow money. Even when a retailer is debt-free, it often needs the ability to borrow money. That can enable it to buy in stock that it may not sell for many months, such as during the crucial Christmas trading season.
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Superdry told the market last month that it was in negotiation with a specialist provider to replace its existing lending facility. The good news is that the company has now agreed a deal. The bad news is that the interest rate is high. That could be bad for profitability. I also see it as a sign that mainstream banks may not be keen to lend to the firm, which raises a red flag for me as an investor.
However, I see the deal as positive overall. It reduces short-term cash flow risks for Superdry, refocussing the investment case on its trading performance not borrowing capacity. At 20 December, the company’s net debt was a modest £13m.
Trading momentum
The company’s statement last week was encouraging when it came to trading performance. It reported that revenues grew 3.6% in the first half of the year compared to the same period the prior year.
Superdry has seen strong growth in its stores, with modest growth online and a decline in wholesale volumes. The company expects the wholesale business to improve in the second half of its financial year.
While that revenue growth may not sound great, especially in the context of high inflation, I actually think it is reassuring news. Superdry has a market capitalisation of under £100m despite its well-known brand name. That reflects investor concerns that the brand is losing appeal. But sales growth suggests that in fact, Superdry customers continue to find the brand and product range attractive. Maybe the brand retains its customer appeal more than the company’s doubters think.
Can the share price soar?
Set against that, I see Superdry as a bargain, which is why I added it to my portfolio. The shares trade for less than half of their price a year ago and have lost almost 94% of their value in five years.
But sales are growing, the company returned to profit last year and I think its unique brand is a valuable asset. The new financing arrangement removes short-term liquidity risks and allows management to focus on returning the business to full health.
I still see risks here, including high interest costs and the impact of inflation on profit margins. But I think the current market capitalisation undervalues what is an attractive business. If the good news continues, I reckon 2023 could see a soaring Superdry share price. I plan to hold my shares and hope for that.
