Are We Saying Goodbye to Superdry plc? – Podcast Episode #87

This Past Week…..

It’s been another busy week for me. There are several companies that have released annual reports and financial updates in March, April, and also May. An abundance of them, all at the same time of year, which has made this time of year very, very busy for me in terms of doing analysis, updating the reports for my clients, reading all the annual reports from these companies. But I am slowly getting there. I’m down to three companies left to do by the end of May. This is awesome, because it means I’m going to get it done and it means I won’t be behind in June.

June is a quiet month for me, because there’s only one company I have to do. It means I can dedicate some time to the US project that I’ve been working on, doing a similar sort of thing, basically, as what we’ve been doing in the UK, but with US stocks. And that process has already started. I’ve started to build a watch list of US stocks. It’ll be fun to find some more US companies that we want to invest in, that we’re happy with, that we like the looks of and that tick all the boxes.

This Weeks UK Stock Related News

To start with, I want to talk to you about some market news, because there’s a few things going on out there in the world at the moment. The first thing is, you may or may not have heard of the UK stock Superdry [LSE: SDRY], who are a clothing brand.

I believe the brand is very much a Japanese product. And you’ll remember a while back, probably, all the kids wearing Superdry stuff. I’m talking about all the teenagers, the kids at secondary school. I’m talking probably talking 10 years ago. And I remember sitting in my office and looking out the window and seeing all the school kids come past, and they’re all wearing this Superdry stuff, bags, coats, all sorts of merchandise. And I was like, “what is this Superdry thing I keep seeing everywhere?” And it was a clothing brand, and it just skyrocketed in terms of popularity amongst teenagers, essentially.

What’s really interesting is that that didn’t last particularly long. It lasted a few years, and then suddenly it’s not really in fashion anymore, to the point where I’ve spoken to teenagers that I know about Superdry, and they’re like, “nah, that’s old-fashioned. People don’t wear that anymore”. And I’m like, oh, that’s interesting how a brand can go from everyone wanting to wear it to, suddenly, no one would be seen dead with it. And it’s such a strange concept to me.

Superdry announced that they’re preparing to run an emergency four-week sale process if creditors block the founder’s plans to inject up to 10 million of his own money into the fashion chain in a bid to try and save the business from insolvency. And I did a YouTube video a while back, probably two or three years ago now on Superdry, which is still up there if you care to go and look for it. But it was an analysis of the particular stock, and we didn’t like the stock at the time. Looking at the financials, they didn’t look good. They were heading in the wrong direction, and it looked like the run was over. I haven’t looked at Superdry since. I haven’t taken any time to look at the company at all. Just not been on my radar. So seeing this news, it looks like things have continued to just get worse and worse and worse. Julian Dunkerton, I guess that’s the founder, is saying he wants to stump up £8 million in an open offer available to other shareholders, or £10 million in a placing that would only be accessible to him. And the share sale would precede Superdry’s delisting from the London Stock Exchange. So unfortunately, it looks like things haven’t worked out for that company.

And how interesting is it that the company can just rise and fall like that purely on a brand being popular for a little while, and then as soon as people decide that brand’s not relevant anymore, it’s gone. And that’s happened quick.

This was a big Japanese company as well. So presumably it’s hit the Japanese sales.

In other news, Topps Tiles plc has said on Tuesday that it swung to an interim pre-tax loss as revenue fell in what they call challenging trading conditions, which of course they are at the moment. In the 26 weeks to March 30th, the tiling specialist swung to a tax-loss of £1.5 million from a profit of £1.7 million in the same period the previous year. The revenue’s gone down 6%, driven by lower footfall. And this is the weak economy that we’re dealing with.

This is what many UK companies are facing right now. Even some of my hand-picked watchlist companies that I love are suffering. Companies that were making 20% net profits are now making 10% net profits. And companies that were making 10% are just about making a bit of profit here and there, 2-3%. And this is why when I am handpicking companies, I’m looking for high profitability because even during difficult times, they’ll still have some profit coming in that they can use to continue to grow and pursue their growth strategies. When you’re investing in companies that are making 2-3% net profit in a good year, they’re losing money when tough times come around, and that’s not good for share prices and therefore not good for your portfolio.

Online car retailer Cazoo are going into administration. They were very popular at one point, but we haven’t really heard much or seen much advertising from Kazoo. Certainly I haven’t personally. Once valued at over 5 billion pounds. Now looking set to enter administration apparently. They’re reporting significant layoffs, 700 employees losing their jobs already.

And then we’ve got news that Shoezone plc are cutting their profit forecast.

These are all companies, Superdry, Tops Tiles, Shoezone. I’ve done videos on all these companies over the years on my YouTube channel. And Shoezone were another company that scored very poorly. Store revenues have fallen 3%. They’ve got 27 fewer stores compared to the previous 12 month period. And shares have gone down 7% as a result of that news. So that’s what’s going on there. And unfortunately this week the vast majority of stock related news has seemed quite negative. Superdry, Tops Tiles, Kazoo, Shoezone all suffering.

The Importance of Analysing UK Stocks

There are thousands of UK FTSE stocks. Of those stocks there’s 50 I like.

Of those 50, there’s about 15 that are priced at a level that makes sense to buy at right now. The rest are overvalued. They’re too expensive for what you get. The overvalued good stocks are still good purchases, however.

There are going to be situations and certain circumstances where you as an investor will still choose to overpay for a stock because of the growth potential. Let’s imagine there might be a company that’s priced at £15. You’ve crunched the numbers. You think it’s worth about £12, but they’re trading at £15. And looking at the growth potential of that particular stock, it’s looking like it’s going to carry on going up, certainly over the next 10, 20 years.

Now you could sit around and wait for that stock to come down to £12. But that might be a stupid thing to do because you may never see £12 again based on, you know, how well they’re doing. And so sometimes it makes sense to overpay. But you want to see all of the hallmarks of great growth potential there. And part of my job is to look at companies in that way. We can’t just look at what does it look like right now. We also have to look at, but what ‘could’ it be? And that requires a degree of speculation. I would say probably it’s a 70/30, 80/20 kind of split. A lot of focus, a lot of effort, a lot of bias, I suppose, in a way, goes towards looking at companies in the ‘now’. What are you getting ‘now’? Because if you can find a company that is priced perfectly right now, as in, they’re trading at £15 pounds, but you’d pay £20 pounds for the share after crunching the numbers, then it’s what I would call a ‘no-brainer’.

Those opportunities are the ones I’m always looking for first. And they exist. There’s companies on my watch list that are in that region right now. When I am putting money into my portfolio and working out, “where’s this going to go this month?“, “What am I buying this month?” That’s where I go first. I’m looking at the companies from the list that right now, today, are trading at a price that’s a no-brainer. It’s a bargain.

However, there are companies in there that are overpriced, that aren’t a bargain right now, but which show the growth potential that I’m talking about. And so you may make that decision to say, I’m aware I’m overpaying right now, but I have such confidence in this stock growing and continuing its historical growth rate, or even something close to its historical growth rate, because that growth rate perhaps has been so good. It doesn’t even need to be as good as it has been. As long as it’s somewhat like it has been, then you’re going to do well out of that stock. And yes, the market overvalues it today, but it’s quite likely it’ll overvalue it in 10 years time as well. And so just because you’re not getting the perfect deal, the perfect situation, today, doesn’t mean you shouldn’t be buying it.

But I’m looking at 50 stocks out of the thousands of FTSE stocks that are available. That’s the caliber of what I’m looking for. Most FTSE companies simply do not match up. And you can imagine the process that took me years to go through every stock, analyze 15, 20 years worth of annual reports, crunch all the financial data. It took work. I had a team of people working with me on collecting and collating all that information and the data and the financial reports, putting it all into some kind of a database that I can instantly get access to.

I can crunch those numbers. I can look at those companies and I can very quickly identify if this is a company I’m remotely interested in. If it is, they go into one pot and that pot is the pot that I’m going to be spending most time in.

If they’re not making the grade financially, there’s no point in going deeper because I’m wasting my time and I’ve only got a finite amount of time. And when you’re dealing with thousands of companies, there’s no way you can deep dive every single stock. It’ll take you a lifetime.

So I put this kind of triage system together where I had a team of people, we extracted all of the financial data from at last 15 years worth of annual reports per company, put all that information into a database, into spreadsheets, in a format that allows me to dive into that spreadsheet and very quickly see, am I interested in this company? We have a scoring system by the way, so anything that scored over 70, we’re interested in. We’re going to look at that stock again in finer detail. And that process involves reading every annual report in fine detail, writing out notes on what they’re doing every year, what the growth strategy is, because the beauty of this is that most investors don’t read annual reports. They don’t even bother. They just look at share price, which is not the way to invest. You can’t invest in a company without knowing the numbers.

It’s insane. Imagine a friend of yours saying “look, I’ve got this chip shop. I want you to come in as like a 50% partner.”

Would you just do it without checking to see whether or not they’re making any money? No. You’d want to see the accounts. You want to understand what’s the revenue like? What’s the trend like? How much profit is the company making? Am I going to get a return on the money that I’m going to pump into this? Or is this just literally me throwing money down the drain? You definitely work that stuff out. And so why is it any different with UK stocks? It shouldn’t be. If you’re investing your capital into a stock, you should be crunching the numbers, looking at the accounts.

And another major reason for that is that when the price starts to come down, you need to know what you’re invested in. Otherwise, how can you make the right informed decision? You can’t. And so if a stock falls from £10 to £6 a share and people are panicking, the reason they’re panicking is because they shouldn’t have been in the stock in the first place.

They don’t know why they’re in it. Because an investor who understands the business they’re invested into and has crunched all the numbers and knows where the company’s going, they won’t be worried about the drop in share price. They’ll be excited about it because they’ll be buying more.

But the companies that scored over 70 went into this one pot and I would then earmark those companies for big deep dive analysis reading every single annual report. And what I was kind of alluding to earlier before I went off on another tangent, was that you’ve got the vast majority of investors not even looking at annual reports, and then you’ve got a small percentage of investors that maybe looked at the last annual report. But when you’ve looked at ‘every single annual report’ from the last 15 years and you’ve done it in chronological order and every single report you’ve gone through, you’ve taken notes, you’ve got a huge advantage over other investors.

What is the business doing? What are they working on? What did they say they were going to achieve? Then you look at the next year’s annual report to see where did it go from there? Did they deliver on their promises? Did they achieve the things they said they were going to achieve? Because once you’ve gone through 15 years and this board have continually failed to meet the things they said they were going to do, that paints a bigger picture for you. That gives you more insight into what’s going on in that company, what the culture’s like. If they keep saying, “we know we need to be doing this”, “we’re going to address that” and “we’ve got a three year plan” but then you go forward three years and find they didn’t meet any of those targets. And all they did was reset new targets and then you skip forward another three years and find they didn’t hit those targets either. And this is the company that historically for the last 15 years has just failed to meet on all its promises that it keeps making shareholders. You’re building a bigger picture on this company.

But the vast majority of investors aren’t going back all those years to find this stuff out. They don’t have any insight on this stock.

On the flip side you’ve got companies that have nailed it every single year. They’re picking up on every single five year strategy. They’ve smashed it and then not only smashed it, they surpassed it. And then they set some new targets and new goals for the future and they smashed those too.

That gives you again another insight as a company with a culture that always meets their goals and sets themselves achievable targets. They know their own business well and what it’s capable of. It adds another element to your stock selection decisions that you can’t get from any other process. You can’t obtain that any other way. And so when you have a company that over the last 15 years have repeatedly delivered every time on their promises, despite the 2008 mortgage crisis, despite COVID, despite the bear market in 2022, they’re still smashing those targets and they’re doing what they’re saying they were going to do. Then when they are now saying “we’re going to do this over the next five years”, you’ve got a pretty good idea that yeah, they probably will achieve that. They’re probably going to do it.

And so then you know what you’re investing in as well as looking at the financials and seeing where the trends are going. But you also understand the company that you’re investing in and whether the CEO has been there a long time and has delivered on these promises or have they got a new guy in or a new female CEO in or whatever. And this all plays a part in understanding your investment because then if a price goes from £10 to £9 to £8 and you’re looking at the numbers and you’re thinking well the numbers are good. And you know this is a company making record profits last year. They’re doing great. And then you dig deeper and you find out the reason they’re going down is because the whole market is going down because the whole economy is suffering. It’s nothing to do with the company. If that’s the case then I’m going to buy more at £8 because last week I could get it for £10 now I can get it for £8. The company hasn’t changed. The financials haven’t changed. The outlook hasn’t changed nor have the goals and the strategies and the targets. All that’s happened is that the wider market has developed a more depressed view of things. Well that’s fine for me because I can now get a lot more shares for the thousand quid I’m about to pump in. So I’m going to buy, knowing where this company is headed, knowing that I would have bought at £10 but now I get to buy at £8 which is great. Whereas other investors are selling! Crying themselves to sleep and muttering “oh god this is terrible”.

This is the difference between someone who doesn’t make any money investing and people who end up making great returns. It makes all the difference.

What Went Wrong at Superdry plc?

Now my information on Superdry closed at 2021. I stopped taking information and populating the database from 2022 onwards because this was a company I decided we are not interested in, we never will be. The reason I came to that conclusion was because there had been a dramatic drop off in financials of this stock since 2018. This is a company that was doing fantastically well up until 2018. From 2009 to 2018 we saw revenue go from £76 million to £872 million. I mean 1000% return over 9 years. Amazing growth. Very rapid.

And then in 2018 that was their peak because revenue then started to drop. And it didn’t just drop, it dropped quick. Just three years later by 2021 revenue had fallen from those highs of nearly £900 million to only £500 million.

That’s like half the revenue gone in just a couple of years. That drop off is quick. But what I also noticed by crunching the numbers is that the expenses stayed the same. So when you’ve got a company whose revenues are dropping quick, yet your expenses of running the business are still at the same level they were at your peak. Well, that’s not good.

And in 2019, 2020 and 2021 every single year the expenses of running the business came to about 140% of the gross profit of the company. And when you’re over 100% in expenses that’s not good because that means that you’ve made a loss, and we haven’t even started deducting interest on debt. We haven’t started we haven’t deducted extraneous costs. We haven’t deducted R&D costs. We haven’t deducted depreciation and amortization. We haven’t deducted taxes.

So, if you’re already down at that point then you know you’re in trouble. And this is a company that fell from a 7-8% net profit per year company. By 2019, 2020 they were losing 20% a year.

Losing 20%. In financial sense that’s about £150 million pounds a year in losses. And it was so quick that eventually it was like these kids buying the clothes were just like “yeah, done with that”.

2018 all the kids were buying Superdry product, by 2019 kids weren’t interested in Superdry anymore. How quick is that? I mean it’s amazing. And sales have dropped so quickly.

Superdry had £300 million in debt that they’d had to borrow to try and bail out the business and that debt borrowing just continued. Their net assets were racing towards a net loss as well. When we talk about net assets, imagine all the assets the company owns. We’re talking cash in the bank that’s an asset, plant, equipment, you know real estate that they own, intangible assets like licenses, trademarks, rights, that sort of stuff all has a financial value to it. You then add all the value of that together and in 2018 it came to about £600 million. But then you have to deduct all the liabilities, so all the things that they own that cost them money. Outstanding invoices they haven’t paid and an example of liabilities.

We’re talking about debts too. And you deduct all that from the assets and then what you’re left with is the equity, the net assets if you will, and we also refer to that sometimes as ‘net worth’.

So if you wanted to work out your net worth you add together all your assets that you own, you deduct all the liabilities, your mortgage, your car, all that kind of stuff, stuff that takes money out of your pocket, and then what you’re left with is your equity, your net worth. Some people have negative equity which is not a good position to be in.

But this is a company that whose net worth fell from £400 million to only £90 million by 2021, just over three years. By 2022-23 this is a company that will probably be in negative equity, because they’ve gone so quickly from £400m to £90m in just two years that they’re probably going to end up going into negative in a few years later if the trend continued, which I’m sure it probably did. Because we’re now in a situation where the media are reporting they’re fighting insolvency from £8 to £10 million to try and keep them alive. This means that they must be a tiny little business now compared to the heights of when they were raking in £900 million in revenue a year.

My over-arching point here is that we would have seen the warning signs come in from 2019 onwards. I don’t know how much that would have saved us in terms of share price, but this is a stock that we would have been very aware was in trouble. It was in trouble even at their peak. This is a company that we would never have invested in, let me make that very clear. Looking at the finances, we would never have been interested in this stock because they were never good enough. The height at their peak they were making 7% net profits. Not good enough for what me and my members are interested in. Superdry doesn’t make the grade. But at that point the shares were priced on the market £20 a share.

By 2019 we were looking at about £12 a share, so at that point the it’s obvious that this company is in trouble. Not from the share price mind you. The share price does reflect the reality, but you wouldn’t use the share price to necessarily tell you the picture. You use the financials, you look at the company performance.

The company performance would have told us that in 2018, 2019 there was a problem here and that people probably wanted to get out and you probably would have got out at £12. And who knows when you would have got in, you wouldn’t have got in at £20, you would have probably got in years earlier. Back when it was trading at £8, so you may have managed to take a little bit of profit out of that stock over the years that you held it. But by £12 that’s when people would have been thinking “ok, this is obviously not going in the right direction” by 2020-2021 it’s down to £2 a share. Today, it’s at 7p.

So by looking at the analysis, by knowing what you’re investing in, it can save you so much money in avoiding unnecessary losses. And every week on this podcast I’m going to be picking a stock, perhaps a stock that’s in the news for some reason, and we’re going to look at it in detail and go through it and that’s the plan.