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One of my stock market moves this month was to buy more shares in the designer and clothing retailer. super dry (LSE: SDRY). But Superdry shares have had a very difficult few months. In fact, it’s been a terrible five years for the company, with shares losing 93% of their value.
Why have I been shopping?
investment case
Many people think that Superdry is an old fashioned brand. Some investors are questioning its business prospects at a time when many clothing retailers are battling inflation and an uncertain demand outlook.
I think the brand is very powerful. It’s unique. One of the criticisms made of it is that it is reserved for middle-aged men who are trying to show their coldness. But many middle-aged men who are trying to show their coolness have a lot of money.
The company can sell clothing and accessories itself. But because the brand is iconic, the company can also license it for others to use. Licensing can be a smart way for a business to make money. If you have a strong brand, licensees can shell out big bucks to use it. Much of that may be pure profit.
For starters, the company founder has spent his money buying Superdry shares three times this year. Those transactions totaled more than £800,000 and all were at a higher share price than today. The purchase of a director is not enough by itself to make me buy a stock. But I like when management shows its confidence in a business by spending its own cash on stock.
Risks to Superdry shares
But if the investment case is so rosy, why have stocks fallen so steeply?
At the end of last year, the need for new financing agreements worried investors. When they were agreed, concern shifted to what those new arrangements were. Superdry had turned to a specialist lender, suggesting that major banks may have resisted the company’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 like me.
In its first half, the company posted year-over-year revenue growth of 3.6%. But it went to a loss and issued a profit warning, cutting an expected adjusted profit before tax for the year by £10m to £20m until it reached ‘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 this timebut it is still an option for the future.
why did i buy
Clearly Superdry has challenges.
But its £87m market capitalization looks very cheap to me.
Last month, the company announced a plan to license its brand in key Asian markets for an initial fee of $50 million payable in cash. If your partner is willing to pay that, I think it will build the brand presence in a way that could help the company globally.
I also think the deal affirms the investment case that I see here, especially around the value of the brand if properly exploited. Buying Superdry shares is clearly risky, but I also see strong grounds for optimism.
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