Stockwatch: Time to back this new CEO

Are shares in SuperGroup, the clothing wholesaler and retailer best known for its Superdry brand, poised to rebound? The chart currently shows a circa 20-month low which coincides with a new chief executive poised to detail his growth strategy on 26 March, five months after settling into the role. This factor is additional to profit recovery expectations (see table) partly based on better clothing sales recently.

What's more, despite a price/earnings (P/E) multiple in the mid-teens, annual growth in forecast earnings per share is such that dividing these variables arrives at a PEG ratio below 1.0 for both the 2015 and 2016 financial years . That implies investment value according to this classic measure of growth stocks. Just mind how fashion retailing is sometimes fickle and PEGs can change over time.

An update is also anticipated on capital structure thereby potential for a dividend, which two brokers' analysts are targeting for the year to 26 April 2016. Last December's interim statement cautiously said the board considered the business best served by retaining cash to support growth, although it would keep the policy under review.

While the consensus forecast implies a prospective yield only just over 2%, a payout ticks a box potentially for more institutions to buy. Over £90 million of net cash is currently projected by the 26 April year end, versus £66.5 million last October. Analysts anticipate the dividend prospect not to undermine the company's ability to do deals e.g. buying back its US licence or partnering for the Chinese market. It's partly a leap of faith, but certainly worth watching.

Underlying performance in context

The final quarter of the year to 26 April 2014 saw a more challenging retail trading environment, and despite sound wholesale revenues, annual profit was indicated at the lower end of consensus. More positively for the medium term, management said it had passed the peak of infrastructure investment and had a strong pipeline of new stores, especially in mainland Europe.

Unfortunately, autumn trading was then hit by exceptionally warm weather just as retailers were positioned with outerwear for cold days - hence annual profits were revised down from a consensus £70.3 million to the current £62 million. The run-up to Christmas, however, was plenty more encouraging: a 14 January update cited strong Christmas trading with like-for-like sales up 12.4% over 11 weeks and total retail sales up 17.8%. All areas of the group performed well, said partly due to the group's swift delivery promise. The benefits of IT investment also proved themselves from Black Friday onwards, and cold weather after Christmas regenerated sales of the outerwear and knitwear. Profit guidance was maintained at £60-65 million amid the weakening euro and one of the group's key wholesale customers going into administration.

The shares also recently fell amid the shock departure of SuperGroup's finance director due to personal bankruptcy albeit "which is wholly unrelated to the financial position of the company."

Europe is seen as a substantial opportunity

The existing case for profits recovery assumes no further weather upsets and upside from new clothing ranges, also online development and expansion in continental Europe. Stores are 96 in the UK and 43 on the Continent, with belief in potential for at least 400 owned stores in countries where SuperGroup controls its brand. This number could be higher on the European mainland given the clothing market there is some seven times the value of the UK's; although that quite depends on the European Central Bank's QE programme invigorating economies, and it would tie financial results increasingly to the euro. In the 2013/14 year, 35% of revenues derived from continental Europe.

In such context, the new chief executive has already served as a non-executive director for two years and was chief executive of Co-op Group from 2013 to 2014. Before that he ran Kingfisher UK. SuperGroup's previous chief executive and founder has moved into a new role as product and brand director.

Such a split looks a classic effort to allow a creative and entrepreneurial person to concentrate on that role, in tandem with a seasoned professional manager. It was probably an eventual response to issues with managing rapid growth that broke out in 2012, when I drew attention at 630p to 650p and a forward P/E multiple of 12 to 13. The stock rose to 1,415p in 2013 and higher to 1,744p in early 2014, but has since de-rated dramatically.

Strong net cash for corporate development

The end-October balance sheet had £66.6 million cash and only £0.1 million debt plus £1.3 million provisions for other liabilities and charges, so is squeaky-clean for funding development. Intangibles represented a modest 18.2% of net assets with no capitalised goodwill declared, the only aspect to raise eyebrows being a 44% jump in inventories to £108.2 million.

This is not explained in note 11 to inventories, but in a "working capital investment" section as relating to higher residual levels of stock (due to changes in the retail environment, partly linked to weather), also higher levels of accessories/gifting ahead of Christmas. The cash flow statement shows this chiefly offsetting profits growth such that cash generated from operations fell from £22.0 million to £1.7 million.

Adds up to an attractive risk/reward profile

While SuperGroup will always be exposed to changing consumer behaviour and the mercurial challenge to adapt, its stock is rated modestly relative to expected improvements in financial performance, long-term development potential, and the new chief executive possibly about to substantiate this. Macro risks include possible uncertainty for UK consumer spending if May's election delivers a hung parliament, and if European quantitative easing fails to achieve much recovery. On the basis that broad economic recovery continues to muddle through one challenge after another, the stock's profile is attractive.

For more information see supergroup.co.uk.