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Surfstitch Group Ltd share price smashed despite soaring revenues

The surf is up for Surfstitch Group Ltd (ASX: SRF) after the company reported a monster wave of revenue growth for the first six months of the 2016 financial year – but the market hasn’t taken too kindly to the results, pushing the Surfstitch share price down more than 20% to $1.38.

We are talking revenues rising by 40% to $144.9 million compared to $103.6 million in the previous half year. Sales were strong across all regions, with North America rocketing up 63%.

The surfwear retailer and online action sports company also reported a handy profit of $5.7 million on a pro-forma basis (which excludes IPO listing, capital raising and acquisition fees). That was up nearly 2,000% compared to the previous year.

Surfstich also reported $2.3 million in operating cash flow, which combined with a $50 million capital raising, means the company now has $61 million cash in the bank and no debts.

No dividend was declared, and at this stage no dividends are planned, with cash generated being ploughed back into growing the business.

So What?

The company is rebranding itself under the SWELL brand, with products spanning surf, skate, street and snow and including apparel, accessories, footwear and hard goods.

Judging by the company’s half year presentation, it sees itself as the Amazon of the action sports sector, providing not just retail products but a whole digital experience.

It’s an excellent result for a company that was once 51% owned by Billabong International Limited (ASX: BBG) – no wonder Surfstitch has a market cap of $383 million, 28% higher than Billabong’s.

What now for Surfstich?

The company says it expects double-digit revenue growth to continue, with strong gross profit margins. And while the company says it will focus on organic growth, it says there are opportunities for acquisitions to support the group’s strategy.

The company is aiming for $1 billion in revenues (roughly 3.5x annualised first half revenues) within 5 years.

Foolish takeaway

Surfstitch’s share price might look very expensive at around $1.38, and a rough P/E ratio of around 33x. But for a company in growth mode, P/E ratios don’t mean much. Whilst it is obviously a high risk (potentially high return) play, Foolish investors might want to make space in their portfolios for Surfstitch.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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