Is it finally time to buy Superdry stock?

Superdry stock is down over 75% since the start of 2018. Michael Taylor argues why it is fraught with risk.

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Superdry‘s (LSE: SDRY) share price performance has been rocky, with shareholders’ investments down over 75% since the start of 2018. With several profit warnings, founder Julian Dunkerton returned to the helm of the high street retailer in April and has since been on a recovery crusade. 

The entire board resigned in protest at his return but he was, and still is, the company’s biggest shareholder. Dunkerton won by a whisker, against a board that he believed did not understand the way the business should be run. Previous chief executive, Euan Sutherland, had been publicly criticised by Dunkerton at length, despite having run the business since 2014. 

The heroin of discounting

One of the issues with Superdry is that the company has succumbed to the seduction of discounting. Many companies fall for the trap of luring in footfall by offering cheap prices and discounting stock. But it backfires as it starts and feeds an addiction of punters wanting cheaper and cheaper prices. Why would they pay full price for an item that regularly goes on markdown at a significant price reduction?

This impacts a business’s gross margin heavily and devalues the brand. Nobody would buy Nike shoes if they were the cheapest on the market. 

This is something that Dunkerton and the new board have worked to change as seen in the recent pre-close trading update, with the store gross margin up 3.2% to 71.4%. It’s a start, but I fear it will take a while to ween shoppers off the addictive effects of discounts.

Sales are struggling 

One thing I look for in a growth business is healthy top-line growth. That is definitely not the case at Superdry, with group revenue down 11.3% to £367.8m. 

There isn’t a single part of the business performing well yet (although the turnaround remains in its early days), with store revenue, e-commerce revenue, and wholesale revenue all down in double-digit percentages. That’s not good. 

The problem with retailers is that those businesses are operationally geared. The costs are fixed regardless of how many people walk through the doors, and when times are good, the business benefits from those fixed costs and geared profit. But when times are bad, those same costs become burdensome, as firms cannot do anything about the fixed rent. 

Moving forward

The incumbent board expects to make changes and bring back growth to the business. It wants to do this by adding new product in stores and online, and Dunkerton has brought his old designer back for this task. By improving product design and quality, it hopes to increase full-price sales starting with the Spring/Summer 2020 range. 

Costs are also going to be taken out of the business, with a two-to-three-year programme announced to implement strategic changes.

Would I buy?

The short answer is ‘no’. While sales are declining, I would rather wait and see if the new board can bring the business back to growth first before I would even consider buying Superdry stock. My view is that if it can get it right, then there will be plenty of potential profit and I don’t need to try and pick the bottom. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Michael Taylor does not hold a position in Superdry. The Motley Fool UK has recommended Superdry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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