This is still the best retailer on the high street

Little did I know that even as I was penning last week’s article on the internet’s destructive ways, behind the scenes administrators were getting ready to wind up Comet.

Like so many high street retailers, Comet didn’t get its web strategy right. And it looks set to cost upwards of 7,000 jobs and leave a permanent scar on the high street.

Today I want to look at one of the bright spots on Britain’s high street. A company that’s hit the sweet spot between bricks and clicks. The shares have done very well of late, and by my reckoning there could be plenty of mileage left in them yet.

From strength to strength

As news of Comet’s demise hit trading screens, Dixons rallied hard. With one major competitor out of the way, there’s some sense in that. But the rally didn’t last. I guess it didn’t take long for traders to work out Dixons’ similarly malignant problem. Though it has a much better online setup than Comet, Dixons is also cursed by savage online competition.

And anyway, Comet has a lot of stock to liquidate – probably all the way into the key Christmas period.

I don’t see this as a good reason to pick up the likes of Dixons. No, the retailer I want to look at is newcomer Supergroup (LON:SGP), whose solid trading figures released yesterday gave the stock a nice little bounce. Supergroup operates Superdry, the luxury clothing retailer.

Yesterday’s press release showed that the business is on track to meet market expectations for this year. And expectations are for a 20% uplift in pre-tax profit. Much of that comes down to new store openings, be it here in the UK or franchises abroad. But even like-for-like sales (ie before new stores) were up nearly 4% – which suggests the brand is still in the ascendency.

But let’s not forget that last year’s figures were relatively weak – management blunders saw to that. And as I said, what I really want to focus on today is how these guys are managing to get the online strategy right…

How to maintain profit margins

First off, it doesn’t hurt that SGPs target market is the web-savvy 15 to 30 year-olds. Superdry shirts and hoodies aren’t my cup of tea – but who cares about me? I’ll drool over the accounts, and leave the clothes to those who are interested.

Though SGP is growing its product range (the flagship Regent Street store has 38,000 sq ft of trading space!), the majority of stores are actually quite small – around 5,500 square feet. Small and local is what you want these days. Smaller stores make for lower rent and lower rates, not to mention the savings on kitting the things out. OK, so you can’t necessarily show all your wares, but that’s when you push the punters onto the web. Once they’ve bought something, you offer a discount code, or some other incentive to entice them online.

Tesco got this strategy horribly wrong. No sooner had it built a load of new megastores to flog non-food items like electricals, than that stuff migrated online. Poor old Tesco – lumbered with expensive big stores and products with wafer thin margins.

Which brings us on to margins…

In order to make a decent profit in retailing, what you want is a decent brand and the ability to control pricing throughout the sales chain. Now, at first SGP lost track of this. It outsourced the job of getting rid of excess and stock ‘seconds’. But the thing is, the small company it gave the work to did a fantastic job of dumping all the excesses on the likes of eBay.

SGP quickly realised that it made more sense to bring this corner of marketing back in-house. It bought out the entrepreneur, integrated his business into SGP and made him head of e-commerce. Now that’s how you recruit!

It’s all about control. SGP now has complete control over pricing. Just consider how different this is to the likes of Comet, Dixons, or even Tesco. Savvy customers go to the high street for window shopping, then online for the best prices. But SGP can control its pricing both on and offline. And rather than eschew these sorts of customers, it welcomes them.

The new way to retail

The dinosaurs on the high street are fighting the old fashioned way – through discounting. But to thrive as well as survive a successful web strategy is crucial. In many ways, the best looking retailers are of a whole new breed. They’re unencumbered by the old ways of doing things – the big stores, the procurement channels and of course the stuff they sell. What’s more, they’re mostly saddled with debt.

So I find it kind of laughable that many of the old brigade’s stocks are trading on multiples higher than SGP. Yes, even with the recent run-up in price, the stock is still only on about 13 times prospective earnings.

Analysts have got £56m pencilled in for next year. In my opinion, that’s not only achievable, but eminently beatable. Though shareholders shouldn’t expect a dividend any time soon, the good news is that this cash is being reinvested into profitable growth. The company remains cash-rich and debt-free.

I once said that this stock looked cheap at anything under a tenner. And by Jove, was my resolve tested when the stock plumbed its £2.50 lows this summer. But hey, I backed this stock even during the doldrums. At about the £7 level now, I still don’t think the stock looks expensive.

The issue with Supergroup is that it doesn’t pay a dividend. And as you all surely know by now, I think that investing for income is the right way to grow your wealth. If you like excitement and sexy capital gains then Supergroup might be for you. But if you’re after long term wealth, you could do worse than click here and take a look at this report  – it shows the simple trick you can use to double your dividend income.

Sure, there are risks in Supergroup. A stock is always subject to a bout of profit-taking after a decent run. And as ever, the fashion world is a fickle thing. This stock has certainly had its problems in the past – last year’s management blunders (of which there were several) will not be excused again. At this stage, the market is tentatively giving SGP another chance – let’s hope it doesn’t blow it!

Whether you’re in or whether you’re out of this one, we can certainly use it as an example of a retailer that’s got its web strategy right. A lot of high street hawkers could learn a thing or two from these guys.

• This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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  • SteveH

    This sounds very enthusiastic, like a plug really

    For form’s sake Bengt please remember to say at the end of every piece that you do (or equally that you don’t) own shares in companies listed.

  • Night Raider

    The key problem with the stock is something that anyone in the 15-30 age group you mention could tell you. The brand has lost its lustre. Too easy to get hold of (you can buy it everywhere). Company grew too quick and lost it’s appeal. i agree it could have been huge, but the position in the market was all wrong. Too cheap, so was always going to lose appeal after a few seasons (as everyone was wearing it) unless they are at the fashion sharp end like H&M/Topshop (which they’re not).

    4% same store growth says everything for a company this young. I imagine soon it’ll be negative.

  • Richie

    What’s with the awful spam link to a video about dividends?

    Though Superdry clothes are awful, I can accept that SuperGroup might be a good investment. Wasting my time with promo-links detects from the quality of the journalism however.

  • Richie

    What’s with the awful spam link to a video about dividends?

    Though Superdry clothes are awful, I can accept that SuperGroup might be a good investment. Wasting my time with promo-links detects from the quality of the journalism however.

  • Robert

    Quite agree with the other comments – is this meant to be journalism or a private plug for your own various interests?

  • Me36

    Superdry are not luxury clothes, they are I would say average priced, not cheap (Primark)

    Luxury clothes are Prada, Chanel, Louis Vuitton etc

    Also the age range who buy them are often reliant on the bank of mum and dad, which is currently under a lot of pressure

  • Boris MacDonut

    No Bengt. The best retailer is Dyers in Ilminster.

  • Gururaj

    Hi Bengt,
    I usually like your articles & advice, however you sound very biased in this piece, now it might be that you wanted to prove a point to someone, but hey you are writing to convince everyone why this is a good investment not to show that you were correct!
    Also pls disclose what your position is with regards to this stock

  • Bapodra Investments

    What we should be talking about is the price movement of this stock the latter part of 2012. This stock was in the mid £2.00’s and is now trading in the mid £6.00’s. These are fantastic returns for anyone who boughgt near the bottom and still has a position in this stock. There has been some serious upside with lots of potential upside still to come so the prospects for this stock are encouraging. If SuperGroup has a good Christmas and there is more positive news from it’s India project then I can see this flying over £8.50 within the next 12 months.

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