Superdry – Does It Need a Revolution?

I mentioned the requisition of an EGM to appoint two new directors at Superdry (SDRY) in a previous article. Here’s some more analysis:

The requisition has been submitted by two founders – former CEO Julian Dunkerton and James Holder who together hold about 29% of the ordinary shares. They wish to appoint Julian and Peter Williams as non-executive directors – Mr Williams is a very experienced director of consumer products companies and is currently Chairman of Boohoo.com Plc although he is stepping down from that role this month.

One does not doubt that Mr Williams would act independently as required by company law, and it is surely not unreasonable to have a nominee on the board representing shareholders who hold 29% of the company.

There was another announcement from the board of Superdry yesterday even more vociferously opposing the resolutions but they had already rejected the need for the requisition as not being in the company’s interest. They said that the current strategy is supported by shareholders and that this requisition will impose needless distraction and costs, i.e. the usual reasons given to rebuff any change.

Let’s look at the reasons for the requisition – apart from the general impression given that the founders think their baby is being screwed up by the new management – a common feeling of departed founders as I know personally. But the company does appear to have real problems if you just look at the share price – down from its peak of 2025p in January 2018 to 520p now, i.e. down 75%. In the results published in July 2018 the company proclaimed “double digit growth in sales and profits” and declared a special dividend, but subsequent announcements have been negative in tone. In October the company reported unusually warm weather had affected sales of heavier weight products which were a big proportion of its sales normally. They announced a diversification into lighter weight clothes and new product categories as a result. But weaker consumer confidence was also mentioned as affecting all retailers.

The latest Q3 trading statement, in February 2019, recorded group revenue down by 1.5%. Wholesale was up but e-commerce and particularly store revenue was down – the latter by 8.5% despite retail space being up. Cost savings were being progressed and the “comprehensive transformation programme” has been intensified. Consensus earnings forecasts have been falling so that the company is now on a prospective p/e of less than 10 and a dividend yield of 5%. When once it was seen as a growth business, it is clearly now perceived as having problems.

Superdry has now fallen out of the FTSE-250 index which will have caused some funds to dump the stock, and institutions who picked up 5.5 million shares from Mr Dunkerton in July 2018 will be none too pleased. Is this an example of how quickly a “fashion” retailer can go out of fashion, or simply down to some operational cock-ups? Such as not having the right stock for the prevailing weather conditions?

Mr Dunkerton claims the change in company strategy in 2017 is the cause of the problem and his return to the board would revive the company. He refers to other examples of founders returning such as Steve Jobs (Apple), Howard Schultz (Starbucks), Charles Schwab (at his brokerage), Jerry Yang (Yahoo), Malcolm Walker (Iceland), Steve Morgan (Redrow) and Michael Dell (Dell) who revived their companies’ fortunes.

Mr Dunkerton also alleges failings in product design and a number of operational changes that have impacted sales – he aims to fix the former by bringing back James Holder as a consultant to “reinvigorate the DNA of the brand” whatever that might mean. Although the board says Dunkerton was responsible for the Autumn/Winter 2018 range which contributed to the company’s underperformance, he denies it and says he was cut out of the design process.

Doing my own market research, a quick look at the Superdry web site tells me that the products look expensive, particularly for the target market and against likely competitors. Indeed when I asked one of my sons whether he purchased Superdry products he said only from E-Bay where they are cheaper.

We know High Street retail sales are difficult but on-line sales should be booming, but not at Superdry it seems. Though the on-line market is getting a lot tougher with “fast fashion” retailer QUIZ recently reporting a shortfall in sales due to forced discounting. Comparison pricing by shoppers on the internet is clearly becoming more common and if a brand like “Superdry” loses its reputation and exclusivity they will not be able to charge supra-normal prices. Perhaps that is the issue when there are so many channels now selling Superdry products and discounting so prevalent?

One brand extension being pursued is a move into children’s wear. As the founders’ say: “a kidswear range would destroy the ‘cool factor’ for the 16-24 age group, a key demographic”. I would agree with that statement. You can read more about the reasons for the requisition on this web site, set up by the requisitioners: https://www.savesuperdry.com/

My conclusions: I always discount claims about the weather hitting sales and profits in companies – they tend to complain about the weather being either too hot or too cold when the weather is fundamentally variable. Their stocking and supply chain need to cope with that. Otherwise there seem to be major failings in both strategy and operations at the company. But will just appointing a couple of non-executive directors (one of whom clearly has an urge to interfere in operations) really help? It might just lead to a divided board who cannot agree on anything.

However, there is obviously a need for changes, in leadership and in other regards, which the board has rebuffed in essence. Shareholders are in a difficult position due to the limited nature of the proposed revolution. Shareholders might wish to support the requisition, but urge the board to make more substantive changes at the same time. Or at least have a more constructive dialog with the founders. There certainly seems no good reason to oppose Mr Williams’ appointment.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )