Supergroup faces battle to prove it is no flash in the pan

The UK-listed fashion retailer is desperate to avoid comparisons with the slump of French Connection, James Thompson reports

In addition to countless other brands from Ralph Lauren to Kenneth Cole, shoppers in Macy's in New York could be seen busily browsing Superdry merchandise a week ago. While the brand's presence in the world-famous department store is just one example of the meteoric rise of its owner Supergroup, the fashion retailer's share price has recently resembled the stormy mid-June weather on the east coast of the US.

After floating on the London Stock Exchange at 500p in March 2010, Supergroup scorched to a high of £18.20 in February, but investors have largely rained on the parade of Supergroup since May. Indeed, its shares sank again yesterday by 37p to a soggy £8.63p.

The latest fall on Monday coincided with Supergroup holding an investor day at its headquarters in Cheltenham, where chief executive Julian Dunkerton founded the company in 1985 from a market stall.

Alongside a sharp slowdown in UK consumer spending that has hit many retail stocks, Supergroup's shares have come under pressure for a number of reasons, such as its rapid UK and overseas expansion. Last month, it also paid a hefty premium for a huge flagship store on London Regent's Street, with an annual rent of about £2.5m.

But arguably above all, the group has been dogged by suggestions its Superdry brand could succumb to a similar slump in profits and its share price to French Connection, following the demise of its once-popular FCUK campaign. Indeed, it is now commonplace to see men aged from 20 to 45-years old to be wearing a black Superdry jacket, with its signature Japanese writing on the shoulder, prompting concerns about over-saturation.

Asked about the comparison between Superdry and French Connection, Robert Clark, the senior partner at Retail Week Knowledge Bank, said: "I think it is justified." He added: "I think they are exposed to the fickleness of fashion more than most. It is a distinctive style and people and things move on."

But Mr Dunkerton hit back, adding that hopefully yesterday's meeting with the analysts had "laid to rest" any comparison with French Connection. He said: "It is a very broad-based brand. We are developing and improving the ranges – we are not a single logo. We are a brand that sells across the ranges."

Yesterday, ahead of charm offensive with City analysts, Supergroup said it remained "positive" about the outlook for the group and its continued development this year.

However, Supergroup said its current trading performance was "at the same level" as its fourth quarter to 1 May, when it had posted a slowdown in retail sales growth to 39 per cent. This compared with a leap of 71 per cent over the full year and 92 per cent in its third quarter.

Still, City analysts were relieved that the owner of Superdry – which is sold in 70 countries worldwide through its stores and online – flagged up a "marked improvement" over the last three weeks in its retail sales. Andy Wade, an analyst at Numis Securities, said: "We had been looking for a re-acceleration into the first quarter and are encouraged that this has happened, albeit only in the last three weeks."

He described the meeting as "relatively encouraging" and said the product looked "really good".

At a strategic level, Supergroup, which trades from 61 standalone stores and 70 concessions in the UK, laid out its growth prospects across three core areas: the UK, international and online.

Undeterred by a consumer downturn in the UK, the retailer said it remains committed to its opening programme of 20 stores a year. After opening 21 last year, including three resites, Supergroup intends to open the door on up to 10 UK shops in the first half of 2011-12.

Following the analysts meeting, Mr Dunkerton remained bullish on the group's UK prospects. He said: "If you deliver a great product in a timely fashion and you keep moving and developing it, the UK is still a fantastic growth opportunity for us." Indeed, landlords, such as the Australian developer Westfield, have recognised Superdry's ability to drive footfall and have bracketed it in the same elite group as Apple and Hollister for certain schemes.

Supergroup also has big plans to increase its proportion of sales from womenswear, which accounts for about 37 per cent of its total revenues, as well as its denim business. "Womenswear is a massive opportunity for us because it has never been quite as strong as our menswear," says Mr Dunkerton.

But the real growth story for Supergroup is likely to increasingly centre on its international stores, as well as online over the coming years. It has already launched own-language websites in France, Germany and Belgium, with the Netherlands to follow soon. Online sales now account for 8 per cent of the group's total.

Indeed, Supergroup took a major step to becoming a truly international brand by acquiring its Benelux and French franchise partner for up to €40m (£34m) in cash and shares in February. The fashion retailer's purchase of CNC Collections BVBA (CNC) – SuperGroup's biggest franchise and distributor globally – will help it to expand in Europe, as well as deliver better margins.

In western and eastern Europe alone, Supergroup sees the potential to open more than 1,000 franchise stores. Mr Dunkerton said: "The international side is a huge focus for us because it is so exciting – we are developing all over the globe." Supergroup provided no update on its long-term plans to launch in China, which could put a turbo-charger under its growth. But Supergroup said demand for potential franchises is "very strong", adding it will open about 50 international franchise and licence stores this year, in territories including South America and the Middle East, up from 44 last year.

Given these growth channels, comparisons with French Connection – whose shares closed at 78p yesterday after nearly touching 500p in April 2004 – may seem harsh. But Supergroup will need to continue evolving its product offer and keep a tight control on its expansion to remain in favour with investors. As Mr Clark says: "There is a genuine fear it [Supergroup's growth] will not last. You have to keep reinventing yourselves."

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