I just bought more Superdry shares. Why?

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One of my moves in the stock market this month was to buy more shares in clothing designer and retailer Superdry (LSE: SDRY). But Superdry shares have had a very rocky few months. Indeed, it has been a terrible five years for the company, with the shares losing 93% of their value.

Why have I been buying?

Investment case

A lot of people think Superdry is a brand past its prime. Some investors question its business prospects at a time when many clothing retailers are struggling with inflation and an uncertain demand outlook.

I think the brand is a very powerful one. It is unique. One of the criticisms levelled against it is that it is the preserve of middle-aged men trying to show their coolness. But plenty of middle-aged men trying to show their coolness have deep pockets.

The company can sell clothes and accessories itself. But as the brand is iconic, the business can also license it for use by others. Licensing can be a smart way for a company to make money. If it has a strong brand, licensees may fork over large sums to use it. Much of that can be pure profit.

To boot, the company founder has spent his money buying Superdry shares on three occasions this year. Those transactions totalled over £800,000 and were all made at a higher share price than the current one. A director buying is not enough on its own to make me buy a share. But I do like management showing its confidence in a business by spending its own cash on shares.

Risks to Superdry shares

But if the investment case is so rosy, why have the shares declined so steeply?

At the end of last year, the need for new financing arrangements concerned investors. When they were agreed, the concern shifted to what those new arrangements were. Superdry had turned to a specialist lender, suggesting mainstream banks may have balked at the firm’s risk profile.

The company said last week that it is considering how to further strengthen its balance sheet and one option would be to issue new shares. That risks diluting existing shareholders such as myself.

In its first half, the company saw revenues grow 3.6% year on year. But it swung to a loss and issued a profit warning, cutting a forecast adjusted profit before tax for the year of £10–£20m to ‘broadly breakeven’.

Following its share price collapse, the company could be a takeover target. The founder said last month that there are “no plans to do this at the moment” but it remains a future option.

Why I bought

Clearly, Superdry has challenges.

But its market capitalisation of £87m looks dirt cheap to me.

Last month, the firm announced a plan to license its brand in key Asian markets for an upfront fee of $50m, payable in cash. If its partner is willing to pay that, I think they will develop the brand presence in a way that could help the company globally.

I also think the deal affirms the investment case I see here, especially about the value of the brand if it is properly exploited. Buying Superdry shares is clearly risky, but I also see strong grounds for optimism.

The post I just bought more Superdry shares. Why? appeared first on The Motley Fool UK.

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C Ruane has positions in Superdry Plc. 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.

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