Australia | Sep 26 2016
This story features PREMIER INVESTMENTS LIMITED. For more info SHARE ANALYSIS: PMV
Retail network Premier Investments continues to perform well although brokers note some tough comparables will be cycled in the current half year.
-Smiggle and Peter Alexander lead the sales outlook for FY17
-Youth brands underwhelmed in FY16 because of holiday mismatch
-FX translation headwinds buffetting Smiggle UK roll out
By Eva Brocklehurst
Fashion retail network Premier Investments ((PMV)) is shaping up to perform well in FY17 as it rolls out further stores for its fun stationery and sleep wear brands, Smiggle and Peter Alexander.
Mature brands under performed in FY16, with sales overall declining. Still, management has signalled that trading picked up in June and July and it finished the year with a clean inventory position.
The second half was understandably weak, brokers agree, given it included a warm start to winter, the unfavourable timing of Easter and the federal election, with negative performances from Dotti, Jay Jays and Portmans.
The half year featured a misalignment of school holidays and, as a result, management suggests its youth brands were particularly affected. Brokers observe this is borne out by the fact there was no sales growth in Jay Jays, Dotti or Portmans over the second half.
The macro outlook does not support above-trend sales growth in FY17 and the company is cycling strong like-for-like comparables. That said, UBS considers the outlook is still reasonable and forecasts first half sales growth of 1.6% and FY17 2.5%.
The broker expects the benefits of direct sourcing in core brands and an increased skew towards Smiggle and Peter Alexander will lift gross margins to 67.5% from 63.9% over the next decade.
UBS expects 750 Smiggle stores will be rolled out including new regions yet to be announced. Should Smiggle increase its footprint to 1500 stores over the long term the broker's valuation would increase by 39% to $23.15.
Earnings in FY16 beat Macquarie's estimates but this was largely because of cost reductions. The broker remains a supporter of the Smiggle roll-out internationally but highlights FX translation headwinds currently buffeting Smiggle UK. Management has found there has been no impact from the Brexit decision on its stores, which have been trading modestly better post Brexit.
Lower tariffs and an increase in direct sourcing from factories helped gross margins, Citi observes, but with the reduction in hedged FX rates for FY17, gross margins are expected to decline by 70 basis points. The broker retains a Sell rating and believes, while growth in Smiggle is strong, this is factored into the share price.
Credit Suisse believes the market is too bullish about FY17 and not taking into consideration the company will be cycling a “perfect” Christmas. The broker does not take into its calculations the upside based on potential new markets being developed in Smiggle but believes the lower guidance for the number of new stores being opened for Smiggle in the UK does not appear to be anything other than prudence.
The UK business is expected to be marginally loss making and move to significant profitability from FY18. Growth appears to be behind industry comparables in the clothing stores, although the broker acknowledges the underperformance of Premier Investments may reflect a skew to youth brands in its portfolios.
Store development over the next three years for Peter Alexander is expected to take the number of stores to 115-120. Beyond that Credit Suisse suspects there would be few premium locations in Australasia. The company has stated it intends to open 5-7 stores per annum through to 2019 with 3-5 being refurbished.
The broker notes Jay Jays sales were down 1% and below forecasts but comments from the company suggest a reduction in promotional sales events has been successful in lifting profitability.
Results were below Deutsche Bank's estimates but the company's confidence in its Smiggle roll-out and its initiatives in turning around brands and supply chain suggest meaningful growth and margin uplift will be forthcoming.
The broker adjusts earnings estimates to reflect the lower store count at Smiggle. Premier Investments has reiterated the view that the UK could sustain 200 stores, which would represent $200m in revenue over the next five years.
FNArena's database shows four Hold and two Sell ratings. The consensus target is $15.07, suggesting 5.8% in downside to the last share price. Targets range from $13.80 (Citi) to $16.60 (UBS).
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