I just bought more Superdry shares. Why?

One of my moves in the stock market this month was to buy more shares in designers and clothing retailers Super dry (LSE: SDRY). But Superdry’s stock has had a poor few months. Indeed, it has been a terrible five years for the company, with shares losing 93% of their value.

Have I bought it?

The investment case

Many people think of Superdry as a brand of the past. Some investors are questioning their business prospects as many apparel retailers struggle with inflation and an uncertain demand outlook.

I think the brand is very powerful. It is unique. One of the criticisms leveled at him was that middle-aged men were trying to appear cool. But many middle-aged men who try to show cool have deep pockets.

Companies can sell their own clothes and accessories. But because the brand is good, the business can also license it for others to use. Licensing can be a smart way for companies to make money. If they have a strong brand, licensees may spend a large amount to use it. A lot of it can be pure profit.

To boot, the company’s founder has spent money buying Superdry shares on three occasions this year. The transactions were over £800,000 and all were made at a much higher share price than they are today. A director buys not enough on its own to make me buy shares. But I like the management showing confidence in the business by spending their own money on the stock.

Risks for Superdry shares

But if the investment case is so rosy, why are the stocks falling so much?

At the end of last year, the need for new financing arrangements concerns investors. When they agreed, the concern moved to what was the new arrangement. Superdry has become a specialist lender, suggesting major banks may not agree with the company’s risk profile.

The company said last week that they are considering how to further strengthen the balance sheet and one option would be to issue new shares. That runs the risk of diluting existing shareholders such as myself.

In the first half, the company saw profits grow by 3.6% annually. But losses and profit risks, reducing pre-tax profit forecasts for the year by £10–£20m to ‘broad breakeven’.

Once the stock price falls, the company can become a takeover target. The founders said last month that there are “no plans to do this at the moment” but remains an option in the future.

Did I buy it?

Clearly, Superdry has a challenge.

But a market capitalization of £87m seems cheap to me.

Last month, the company announced plans to license the brand in key Asian markets at a cost of $50m, paid in cash. If the partner is willing to pay, I think it will develop the presence of the brand in a way that can help companies around the world.

I also think the deal underscores the investment case I see here, particularly in terms of brand value if properly exploited. Buying Superdry shares is clearly risky, but I also see strong reasons for optimism.