Can Pirc poke a hole in the Supergroup bubble?

8th Sep 2013 17:54

Since street fashion designer and retailer Supergroup [SGP] floated on London's main market back in 2010 it has hardly had the smoothest of sashays down the catwalk. It has almost seemed like the company was issuing profit warnings as often as the fashion seasons changed. The company, whose main brand is the popular mock-Japanese fashion label Superdry, has warned the market about its profits on four occasions in those last three years, suffering stock availability problems, glitches with a new warehouse IT system and an "arithmetic error" with its accounts.Although Thursday's first quarter results were highly encouraging, another potential thumb-tack has emerged ahead of what was hoped to be a smoother road ahead in 2013. This comes in the form of Pensions & Investment Research Consultants (Pirc), an important and powerful shareholder group that lends its stentorian voice on independent corporate governance fairness. Its members control equity assets in excess of £1.5trn. Pirc has pinged a missive to its members that recommend shareholders oppose Supergroup's proposed remuneration report and auditor appointment at the forthcoming annual meeting on September 10th. Last year, after a similar recommendation from Pirc, one in five shareholders voted against its remuneration report. Pirc has concerns about executive pay at the company, especially over bonuses, which it said were structured to lead to "excessive payouts" even in normal conditions and were thus not "sufficiently challenging". Chief Operating Officer Susanne Given, who was headhunted from John Lewis last year, was paid a handsome total of £773,000 in the period ending April 28th, which included a guaranteed bonus that Pirc particularly disagreed with. Pirc also object to SGP reappointing PwC as auditors of the company. Pirc point to the fact that total non-audit fees came to around a third of total audit fees during the year under review, with a three year average of 228.57%. "There are concerns that this level of non-audit fee creates a potential conflict of interest on the part of the independent auditor," argues Pirc, which has recommended another oppose vote on the AGM resolution.At last year's AGM, almost 15% of the votes opposed her appointment, while more than 15% opposed the reappointment of founder and Managing Director Julian Dunkerton.Will Pirc's poking expose more problems?Are Pirc's objections indicative of deeper problems in the company and should investors steer clear? I don't think so. Will the AGM see a bloody nose for the company? Maybe.Firstly, Given's total salary seems pretty typical, with PricewaterhouseCoopers's 2012 executive pay survey indicating a FTSE 250 main board executive received £799,000 total pay, including bonuses. The guaranteed bonus is, however, rather wrong-headed - and the remuneration committee could at least have set an achievable incentive target instead. Management own a large proportion of the shares, but this has fallen with the departure of Karpathios, the third of the founding fathers. Dunkerton holds 32.43%, according to the last annual report, with co-founding design chief James Holder having 14.7%. When co-founder Theo Karpathios and his 10% stake exited last year just prior to the AGM, the board's influence over the shares has weakened somewhat. One issue that Karptahios disagreed with Dunkerton on was over the issue of pay. Pirc's agitation has seen an average vote against remuneration report votes of 6.82% in 2012, with defeats in 2012 including more powerful companies Aviva and WPP. Supergroup's pay is hardly in the realms of Sir Martin Sorrell's megabuck millions.Street cred in the CityWhile credibility may have run thin with investors and City analysts at times, the man on the high street remained infatuated with the brand's trendy image and results have started to become more consistent and consistently good. The earlier profit warnings should be seen as growing pains, as what was a highly entrepreneurial private company got to grips with the increased professionalism demanded on the public market. Plus a finance director, Chas Howes, who confused a plus sign for a minus sign. Similar, though not quite that embarrassing, jostling between a company and the City were seen at Mike Ashley's Sports Direct. Also, Supergroup has, like many of its ilk, faced challenges brought about by its own rapid growth. Outgrowing your systems and management is not uncommon in fast expanding firms. Last year's departure of co-founder Karpathios, which was painted as amicable by the company despite some major disagreements just before the AGM, is symptomatic of these teenage style growing pains. The addition of experienced big company executives, namely Shaun Wills as finance director in last March and Susanne Given as chief operating officer in April, had brought much-needed analyst confidence into the company. Replacing Karpathios as international boss Hans Schmitt, who joined from Hugo boss where he was managing director, has started to make his mark, with an exciting franchise deal to expand its presence into Southeast Asia.Recent results and valuationFirst quarter results on Thursday were ahead of City expectations, with a greater focus on womenswear helping group sales jump 26% to £75m, with retail up 18% and wholesale up 51%. Looking forward, Supergroup offers potential for significant further growth from its international expansion as well as steady growth domestically. Supergroup has some strong principles that have stood it in good stead, including a disciplined pricing stance (it never discounts) and a prudent bricks-and-mortar expansion plan. It has just 28 retail stores in Europe, which is far less than most of its branded clothing peers, offering the potential for steady but significant expansion on the continent.Investment in the supply chain and optimisation initiatives in the UK retail system have yet to add their effect, while the new management team has only just bedded down. Broker Cannacord Genuity believes Supergroup should trade at parity with Ted Baker as both have similar cashflow return on assets numbers of 10% and underlying capital growth of 20%. Analyst Wayne Brown argues that the company is trading at a 30% discount to its broader international peer group yet is achieving growth around three times greater "before we even consider its premium return profile, higher cash build up and the significant international and online opportunity ahead". He has raised his target price from 1,100p to 1,500p.Fellow broker N+1 Singer notes that as the shares have outperformed the market by a stonking 95% since the start of the year, to trade at over 20 times current year earnings, a 'hold' stance is more sensible for the shares.