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Soft Sales For Super Retail But Profits Line Up

Australia | Oct 25 2016

This story features SUPER RETAIL GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: SUL

Sales for Super Retail were soft in the September quarter as the company continues to take action to address problematic parts of its leisure, automotive and sports businesses.

-Encouraging signs in new format RAYS stores performance
-Sales activity affected by inventory clearances by the Masters chain
-Competition from Bapcor in automotive and new entrants in sports a challenge


By Eva Brocklehurst

Sales over the first quarter of FY17 were softer than expected for Super Retail ((SUL)) but this was countered by cost controls and the company assures the market profits are lining up with budget. Sales in automotive and leisure slowed while sports division sales accelerated. Results continue to be distorted by the closure or re-vamp of Ray's Outdoors stores and associated inventory clearance.

Macquarie observes, while still early days, the performance of the new format RAYS stores is encouraging. Three are also 14 new BCF stores, including 11 converted Ray's stores, expected to open. The performance of BCF in the upcoming summer period will be a key swing factor in the results, the broker asserts.

Definitive action taken on the Ray's Outdoors business and Infinite Sports, as well as improved margins for BCF, underpin Macquarie's FY17 forecasts. Deutsche Bank agrees comparables can be volatile over any given period and this needs to be viewed in conjunction with gross margin to gauge performance. The only gross margin commentary provided related to sports and Ray's and both were stated to be higher.

As group profit appears in line with expectations, Deutsche Bank views this as a positive signal. Comparable sales growth of 4% in the quarter was ahead of the broker's estimates. Automotive like-for-like growth was 2.5%, leisure 6% and sports 4.5%. Capex guidance is reduced to $110m from $115m.

UBS makes minor change to its estimates and suggests the company is on track to meet earnings per share growth of 23%, underpinned by EBIT (earnings before interest and tax) margin growth across the business. The broker forecasts 11% growth in 3-year compound earnings per share, with upside via the successful execution of the turnaround in leisure.

UBS suspects the market is ascribing a very low valuation to the leisure business and considers this overly pessimistic. Investor sentiment should improve as management continues to execute a turnaround. Over the medium term, the growth story remains intact, driven by continued momentum in automotive and sport, margin recovery in leisure and strengthening cash flow.

Tool sales have been affected by clearance activities from the closure of the Masters hardware chain, which Citi expects may persist over the final 10 weeks of the first half. Opportunities in the second half should be created once all the inventory clears and the Masters stores close. The broker is unconcerned about the current volatility, as clearance activity ahead of the closure of 36 Ray's Outdoors stores is proceeding as planned.

Moreover, the new RAYS format continues to show traction, Citi observes, with the segment reporting improvements in average transaction value and gross margins. Gross margins in the sports segment were tracking ahead of the same period last year, signifying better full-price sales and less discounting.

The liquidation of stock at Masters stores may have been highlighted as an impediment by the company but Credit Suisse believes it worth noting that Bapcor ((BAP)) has strengthened its trading in the quarter, reporting like-for-like sales growth of 5.2%.

Super Retail used to be a straight forward growth story, the broker asserts, but now the strengthening position of Bapcor is likely to create a stronger competitor for the automotive division. Also, the entry of Decathlon and JD Sports to the Australian sports retail market is suspected to fundamentally challenge the profitability of the sector and be a new challenge for Rebel Sport and Amart.

Morgan Stanley believes the company is on track to deliver growth of 20% in earnings per share during FY17 despite a weaker top line. The investment case still holds up for the broker as it centres on strong like-for-like sales growth across automotive and sports as these formats take market share.

Ord Minnett understands Ray’s Outdoors, Workout World and Infinite Retail have detracted from the performance of the business and progress is being made to address two of these problematic segments. The broker notes the new RAYS business is performing better and Infinite Retail contracts have been resolved, so both these initiatives should support growth in FY17. More generally, the business retains growth prospects and valuation support underlines an Accumulate recommendation for Ord Minnett.

There are four Buy ratings, two Hold and two Sell on FNArena's database. The consensus target is $10.84, suggesting 4.0% upside to the last share price. Targets range from $9.77 (Credit Suisse) to $11.50 (Deutsche Bank, Ord Minnett). The dividend yield on FY17 and FY18 estimates is 4.6% and 5.0% respectively.

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