article 3 months old

Super Retail Defends Sports With Rebranding

Australia | Jul 26 2017

This story features SUPER RETAIL GROUP LIMITED. For more info SHARE ANALYSIS: SUL

Brokers welcome Super Retail's intention to convert all the Amart Sports stores to the Rebel brand, creating a leaner division that will face the growing competition.

-Brand consolidation reflects a need to achieve scale and cost savings quickly
-The sports division is the most exposed of the company's brands to Amazon
-Credit Suisse suggests the targeted increase in Rebel stores to 200 is bold

 

By Eva Brocklehurst

Brokers welcome Super Retail's ((SUL)) intention to convert all its Amart Sports stores to the Rebel brand. The overlap of customers and cost efficiencies involved suggests this is the best way forward to compete in a tougher environment.

Morgans believes the company is now in a stronger position to be able to fend off increasing competition in this category, a concern that has weighed on Super Retail's share price. The broker reduces its valuation in line with the sector de-rating and to account for increased competition, yet retains an Add rating, acknowledging the key risks include a slowing of consumer spending, margin compression and a significant fall in the Australian dollar.

Management expects gross margin uplift and synergy benefits from the consolidation of $15m per annum after two years. The company will record $34m in after-tax non-cash transformation costs in FY17 and a further $3m in FY18. An additional $9m in capital expenditure for store conversions has also been flagged.

Amart contributes less than 30% of sports division sales and UBS estimates the earnings contribution is materially less, making the conversion accretive to earnings. The broker believes it provides the option to re-invest in price and launch a wider online service. While retaining a Buy rating, the broker also flags increasing risk to the near-term outlook via the subdued consumer backdrop.

Deutsche Bank notes the dual-brand strategy in the sports division was aimed at targeting a full customer spectrum, as Amart was focused on the value/family segment and Rebel in on the more premium/specialist offering. However, the rapidly evolving competitive landscape suggests the move to unify the brands will deliver a business better able to compete in range and service against online and big box competitors.

Deutsche Bank has not changed forecasts, assuming a gradual improvement in the operating earnings margin in sports to the company's guidance of 11% by FY20. The broker expects the $15m in annual synergies identified as part of the rebranding are likely to be invested in price and this provides greater confidence to existing assumptions.

Competition

Can the consolidation address the looming competition issue? The value of equity in the Amart brand may be lost but Credit Suisse believes the strategy pre-empts the consolidation of a market that is moving to significant over-capacity and resulting in declining industry economics.

In contrast to guidance, the broker forecasts a division margin of 8.4% in FY20, reflecting its view of the likely profit trend in the industry. Credit Suisse downgrades to Underperform from Neutral because of the increase in the share price and the continuing downside risk to industry profits.

The broker suggests, given the likely offsetting impact of price reductions, it is unlikely that the improved profitability as a result of brand consolidation will be visible in the results.

The company's sports division is most exposed to Amazon's arrival in Australia and becoming leaner was necessary, in Morgan Stanley's view. The broker believes an upbeat trading announcement has also helped the outlook.

The shares have bounced 18% from the lows made on May 25 and Morgan Stanley considers the FY18 price/earnings multiple cheap. At 11x it compares to a long-term average, one-year forward multiple of 14x and is at a 41% discount to the industrials ex financials. Again, this looks cheap versus a long-term average of 16%.

Ord Minnett questions the ability to retain the synergies and cost efficiencies. The effect of synergies from changing to a single brand is less than the upside from the operating margin expansion opportunity that was guided to previously. This suggests a deterioration in underlying performance and potential. Against this backdrop the broker finds a lack of valuation support and maintains a Lighten rating.

Stores

The consolidation decision reflects a desire to achieve scale and cost savings quickly. The company will convert all the Amart Sports stores to Rebel by October 31, which means the Rebel footprint will increase to 160 stores. While conversion of store branding will be completed by October, the shift in inventory will not be fully implemented until June next year.

Rebel has a target of 200 stores and niche brands in the division make up the difference to a previously-stated 230 store target. While consolidation to the core brand probably creates a more defensive position, a targeted 25% increase to 200 stores by Rebel appears bold to Credit Suisse, and is likely to be realistically sustained only if other retailers close.

In the broker's analysis six Amart stores are within 300m of an existing Rebel store, with several being in the same shopping centre. The potential closure of six stores is immaterial to the analysis, while 19 stores are in the same postcode and provide an additional proximity filter, signalling some cannibalisation of sales as a result of brand conversion. Credit Suisse notes there was no guidance on the rate of investment in price, which will presumably be managed to generate the desired profit outcome.

Macquarie believes the fact that convenience is the major driver of store choice acts to mitigate the customer retention risk. The broker remains positive on the company's market-leading brands in the experience categories and continues to envisage scope for innovation in building omni-channel capabilities.

Super Retail's core automotive division, around 47% of group earnings, is less prone to disruption and the broker find signs of a turnaround in leisure promising. Moreover, Macquarie believes a current -33% discount to the market is excessive and that the risks of Amazon are over-stated for the near term.

FNArena's database shows six Buy ratings and two Sell. The consensus target is $10.13, suggesting 22.9% upside to the last share price. The dividend yield on FY17 and FY18 forecasts is 5.3% and 6.1% respectively. Targets range from $7.50 (Credit Suisse) to $11.80 (Citi, yet to comment on the re-branding).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

SUL

For more info SHARE ANALYSIS: SUL - SUPER RETAIL GROUP LIMITED