There is something I really like about the Superdry business (LSE: SDRY). Its clothes and especially branding are so distinctive they give the firm a competitive advantage. That has not helped investors, however. The past five years have seen Superdry shares collapse 95%. The price has fallen 60% in the past 12 months.
I see some serious risks here but decided to dip my toes in the water this week and bought some Superdry shares. Why?
Recovery plays can be tough
In principle, the idea of a recovery play can be very appealing as an investor. One can buy a share for cheaper than before. So if the share price recovers to where it was before, buying into such a situation could be lucrative.
But that way of thinking focusses on the possibility of shares going up again, without always fully appreciating why they have gone down.
Typically, for a share to lose 95% of its value in a few years, a lot of things need to go badly wrong. Is that the case at Superdry?
Weakening business performance
Last year, Superdry made a £23m profit after tax on revenues of £610m. That equated to basic earnings per share of 27.7p.
Rewind five years and revenues were 23% higher at £752m. Post-tax profits came in at £85m, more than three times higher. Basic earnings per share were just under three times as much, at 81.2p.
Meanwhile, turning to the balance sheet, net cash of £65m five years back has turned into net cash of just £1m. Still, that was a big improvement from the year before last, when Superdry ended the year with £39m in net debt.
Valuing Superdry shares
Clearly the business has declined, but the company is profitable and ended last year with net cash. A 95% fall in the share price would lead me to expect a company on its knees. Superdry is not that.
Instead, it has a strong brand and decent sales, but the market capitalisation is under £100m. The company’s price-to-earnings ratio is less than five.
Risks to recovery
One risk to the company is running out of liquidity. For retailers that can be deadly, as suppliers start to cut credit terms and the company’s problems go into a worsening spiral.
Although Superdry ended last year with net cash, by the start of October this year it had net debt of £38.9m. A loan is due to be repaid at the end of next month.
The company announced this week that it is talking to a lender about refinancing existing debt, although no deal has yet been reached. The lender in question is a specialist financier, which suggests that Superdry may be struggling to refinance loans through mainstream commercial banks. That is an alarming indication of the possible risks banks may perceive at the company. Superdry could end up needing to borrow on unfavourable terms, if it can access financing at all.
But I think those risks are priced in to the share price. The Superdry brand alone is a fantastic asset and I believe management can steer the ship away from the rocks, even if it means paying high interest rates while the business recovery gains momentum. I accept those risks and have invested hoping that the company’s recovery gathers pace.
The post After falling 95% in five years, can Superdry shares recover? appeared first on The Motley Fool UK.
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C Ruane has positions in Superdry. The Motley Fool UK has no position in any of the shares mentioned. 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.