Surfstitch finds a niche

SurfstitchAction sports retailer Surfstitch (SRF) has now risen more than 150% since added to our Quest portfolio in a pre IPO deal in August 2014. The entry price was $0.67. The company listed in December 2014 at $1.00. Currently the business trades at a robust $1.70.

The company reported that sales have grown to nearly $200m through both organic and acquisitive growth while gross margins grew at 37% compared to revenue at 30%. In less than one year, the company has overseen the sale of half the business to investors which was owned by Billabong, acquired the US business Swell from Billabong, purchased Surfdome from Quicksilver, listed on the market and acquired two surf content businesses.

Surfstitch is an online business that does not rely on shop fronts and stocks a much broader range of brands than bricks and mortar competitors. Customers are increasingly referred from owned synergistic platforms rather than relying on search engine referrals. The business is now global with 60% of sales offshore which mitigates the effect of a falling Australian dollar.

The recent sell down by executives is not a concern as this is the first time there has been any sell down by founders in 8 years. Surfstitch continues to rate well in both our qualitative screens and valuation models. Our view is that the stock has an above average ranking in the outlook for growth, has low technical and environmental risk with a long standing executive team. The upcoming year should in our view deliver growth well beyond the market average with guidance indicating an EBITDA range of $15-18 m, an increase of 100% on 2015.