So far, it’s shaping up to be a grim year for struggling fashion firm Superdry (LSE: SDRY). Even with founder Julian Dunkerton back in charge, Superdry’s share price has fallen by 20% already this year.
Tuesday’s dismal half-year results did most of the damage. Superdry shares were down by 16% at the closing bell last night.
It’s been a few months since I last looked at this turnaround story, so I’ve been digesting the retailer’s latest numbers and updating my view on the stock. Here’s what I think now.
Signs of hope?
At face value, Superdry’s results are still pretty poor. Revenue fell by 23% during the six months to 24 October, while the company’s pre-tax loss expanded from £2.3m to £10.6m. Margins fell as the firm was forced to discount more to shift old stock.
I’m not surprised Superdry’s share price is giving up November’s gains. But, in fairness, the company says 23% of trading days were lost due to store closures. I guess the revenue slump isn’t a complete disaster.
There’s also some hope that online sales will start to make a bigger contribution. The group says online revenue has risen by 50% over the last year and now accounts for 50% of retail sales. That’s really encouraging in my view — I think online growth will be an essential element of Superdry’s turnaround.
Two risks I can’t ignore
However, I do have a couple of concerns. Although Superdry reports a net cash balance of £34.1m, I’m not sure how sustainable this is. The company also admits it benefited from £30m of Covid-19 rent deferrals and delayed ordering new season stock. Superdry reduced its inventory levels during the autumn, releasing a further £8m of cash.
Without these favourable changes to cash flow, I think the retailer would be running a net debt balance. And that could be a problem, because the company has warned there’s now “significant doubt on the group’s ability to continue as a going concern.”
What this accounting phrase means is that, if winter sales are disappointing, Superdry could breach the terms of its debt facilities. If this happens, the company’s lenders might force it to raise cash by selling new shares — or even go into administration.
Superdry share price: where next?
I can’t avoid concluding that Superdry shares are a bit of a punt. Firstly, I believe the company’s financial situation is more uncertain than it first seems. In my view, this could lead to a discounted share placing at some point in the future.
My second concern is that, so far, I can’t see any evidence that the brand’s revamp is making progress.
City analysts are taking a more bullish view and predict a return to sales and profit growth during 2021/22. I’m not sure. Although I admire Dunkerton’s personal (and financial) commitment to his creation, I don’t see any way to predict whether he’ll be able to repeat his original success.
Based on this week’s results, I won’t be buying Superdry shares any time soon. I’d rather pay a little extra for a more successful (and profitable) retailer.