Supergroup top pick for Berenberg as investor concerns swept aside

LONDON (ShareCast) - Berenberg has chosen Supergroup (LSE: SGP.L - news) as its top pick in the retail sector as the SuperDry street fashion label moves from being "a business with significant potential to one which is starting to deliver". With a 'buy' recommendation and a 1,160p price target, a 17% premium to the share price, the German bank said time spent "on the road with the company" had persuaded it of the upside potential from both the significant self-help opportunities in the business and from the North America expansion.

Berenberg believes the company's volatile performance history since its March 2010 IPO, perceived execution risk and comparison with US peer Abercrombie & Fitch (NYSE: ANF - news) (ANF) due to the pair's one-brand strategy have overshadowed the stock.

"However, the recent strengthening of management will reduce volatility in our view, while we believe there are key differences between the SGP and ANF business models." New (KOSDAQ: 160550.KQ - news) chief executive Euan Sutherland has added a longer-term strategic focus and is strengthening the business operationally in Berenberg's view, with simple improvements such as a move to a single stock pool, direct sourcing and greater integration between retail, wholesale and e-commerce that together "provide the foundations to take the business to the next level".

These changes, analyst Michelle Wilson believes, should leverage the current cost base to drive like-for-like growth and significantly reduce the execution risk of international expansion.

Wilson (Oslo: WILS.OL - news) said she also believes management guidance of a full year 2016 loss and a 2017 breakeven on the rejigged North American business "could be conservative" due to the significant near-term revenue potential from wholesale and e-commerce sales channels.

Investor (Stockholm: INVE-A.ST - news) concerns about execution risk are being swept aside by Sutherland's decisive actions since appointment late last year and his former experience as COO of Kingfisher (LSE: KGF.L - news) .

A significant differences between Supergroup's business model and that of ANF, the analyst argued, is that the UK company's principle that every individual store must be profitable.

Moreover: "ANF's struggles have been well documented and it seems that some investors believe SGP will ultimately follow the same path. However, we believe a lot of ANF's downfall has been self-inflicted." Finally, on valuation, Berenberg noted that Supergroup share currently trade at an 8% discount to the sector versus a historical 8% premium.