On the Friday before Christmas last year I had a terrible realisation: I haven’t bought enough presents, so now I have to go to Oxford Street.
The next day I got up early and got on the train, and you can imagine for yourself what Oxford Circus station was like at lunchtime on Saturday, 21. Anyway, as I was shoving and sidestepping my way down Regent Street, I was struck by how many of the shops had already started their January sales.
This wasn’t a few bargain basement clothes sellers either. It seemed like most of the big brands had thrown in the towel early and slashed their prices in the hope of making up the difference by getting more punters through the door. Now, that’s not a good sign.
But down at 113 Regent Street, I was pleased to see my old favourite, Superdry, packed with customers, all happily paying full-price for their gear. That says a lot about why SuperGroup (LSE: SGP) is one of my favourite stocks, and why I’ve written about it so many times here in The Right Side.
SuperGroup is a master of profit margins
One of the big reasons SGP stays ahead of the competition is because the company continually strives to improve margins. Unlike most high-street retailers, SGP is not into discounting. As CEO Julian Dunkerton says, the retailers which discounted early this Christmas did worst.
SGP used to sell loads of excess stock through the online auction site eBay. But this year, with better stock management, they’ve been able to slash discounted sales through this channel. Like in the run up to Christmas, they’ve sacrificed a bit of turnover in order to build stronger profit margins.
Also working in SGP’s favour is that the company has total control of its product, therefore its price, and therefore its margin. What I’m talking about here is gross margin – the difference between the retail price and what the product actually costs to make.
Net margin is even more important. That is, how much do you make on a product after you’ve taken into account all the other administration costs of the business.
Now, the great thing about e-commerce is that it can significantly reduce administration costs. And during the first half of this year, SGP’s online sales grew by nearly 30% (excluding eBay). It was able to do that by improving the online offering by introducing click and collect, as well as later cut-off times for next-day delivery. The company also launched a virtual fitting room.
When it comes to IT, it’s much better to be a new business in a growth market than an established business trying to upgrade into a rapidly changing world. As Dunkerton says: “I would say the people in our space are generally getting weaker as we get stronger.”
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It can’t open overseas stores fast enough
Now, SGP’s success isn’t solely built on big profit margins. Turnover has been just as important. Over five years, SGP’s turnover has risen from around £76m to £425m – more than five-fold. SGP has rapidly increased sales area both in the UK and abroad. And in many ways, it’s the international expansion that’s most exciting.
You see, when I first wrote about SuperGroup at the time it floated, this was very much a UK-centric business. And they were making very good money here. But the icing on the cake was always going to be repeating the formula in the much bigger markets abroad. And, by Jove, has this plan started to come together. Superdry products are now sold through stores in 41 countries, and 16 international websites.
And in terms of e-commerce, overseas sales are now higher than UK sales. That’s quite an achievement. SGP can’t open overseas stores quickly enough – that’s why its overseas online sales are going through the roof.
How long can this go on?
Profit is of course a function of turnover and margin. If you’ve got rapidly expanding turnover, together with healthy and growing margins, then you’ve got a successful business. In this case, a very successful business.
And success breeds success. Given the malaise on the high street, retail landlords are falling over themselves to get Superdry stores into their shopping malls.
International franchise partners want to be a part of this growing phenomenon. Of the fifty planned new franchises this year, some 36 have already been signed up.
Profits are expected to grow by around 20% this year, coming in at £61.4m. That puts the stock on a multiple of 27 times earnings.
Yikes – that looks racy! And I don’t deny it, this sort of multiple doesn’t leave much room for disappointment.
And there have been many naysayers that have insisted SGP would be a flash in the pan. My response has always been the same: “Well maybe. But let’s just keep an eye on the trading figures to see about that.”
The fact is the figures speak for themselves. And as long as that remains the case, then I’m prepared to run with it. That said, if anybody had bought this stock when I wrote about it back back in 2012 at lows around the £3 mark, then I can see why you may want to sell some of it now. After all, it’s now changing hands at nearer £16.
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