Smiggle Performs For Premier Investments

This story features PREMIER INVESTMENTS LIMITED, and other companies. For more info SHARE ANALYSIS: PMV

A resilient Premier Investments has highlighted for brokers how high-growth new brands can compensate for the weakness prevailing in apparel retail.

-Womenswear store sales decline by average -5% in FY17
-Smiggle & Peter Alexander become the lead brands
-Strong online growth seen mitigating store-based risks
 

By Eva Brocklehurst

A resilient Premier Investments ((PMV)) has highlighted for brokers how high-growth new brands can compensate for the weakness prevailing in apparel retail.

FY17 operating earnings (EBIT) were up 7.4% and sales up 5.7%. Smiggle and Peter Alexander, the highest margin and highest growth brands, now account for 39% of the company's retail sales and and the UK became Smiggle's largest market in the second half.

Sales per store declined by an average of -5% for the company's core womenswear brands in FY17. The most significant were Portman's, Jacqui E and Dotti, with sales down -8.6%, -6.2% and -3.6% respectively. A weaker fashion cycle was blamed. Gross margins also contracted, with FX hedge rates cited as the key driver.

Citi's industry feedback suggests discounting intensity also increased, as fashion retailers sought to stimulate weak sales. The company is considered to be comparatively better placed to defend against the threat from Amazon, particularly as it is focused on increasing its online capability, although will still need to invest to remain competitive.

The cash performance was below UBS expectations, affected by higher cash taxes and higher inventories as a result of growth across Smiggle and Peter Alexander. Sourcing changes were also made during the year, to Bangladesh from China.

Credit Suisse suggests strong online growth continues to mitigate the store-based risks in retailing. The broker is quietly confident in a strong uplift in profit in FY18, backed by the additional 38 Smiggle stores that are to open in the UK and the potential improvement in gross margins from the marking down that affected FY17.

Morgan Stanley finds it hard to get past the fact that core brands are under structural pressure and the consumer environment is challenging. The broker acknowledges these make up a reducing portion of sales and earnings but the risks are intensifying. International retailers are expanding into regional Australia and Amazon is setting up direct retailing in the country, with apparel a category that is very susceptible.

While there are more reasons to like Smiggle and Peter Alexander the persistence of such negatives, and even assigning a 20% premium for the stock versus the average multiple of listed retailers, leads the broker to set a price target roughly in line with the current share price. Hence, an Equal-weight rating is maintained.

Smiggle & Peter Alexander

Smiggle has announced its expansion into Belgium and the Netherlands in 2018, targeting total global sales for the brand of $400m by FY20. Citi considers this a conservative forecast, and calculates that for every 100 new stores Smiggle opens $1.70 per share is added to the Premier Investments valuation.

Smiggle UK performed strongly and Citi notes differences in the margin structure between Australia and the UK may be driving better profits. Citi believes the Smiggle stores in Australasia have matured and offshore markets will provide the best source of growth in the future.

Smiggle and Peter Alexander have become so significant to the company that they are expected to drive double-digit growth in earnings per share out to FY20. This should more than offset the core brands, which Citi expects to stagnate over the next four years.

Citi suggests strength that Peter Alexander is often overshadowed by Smiggle. The company has previously stated it will consider international expansion for Peter Alexander but appears to be not pursuing the option at this stage. Peter Alexander reported sales growth of 14% and Citi forecasts a compound growth rate of 10% for the next three years. This will come from both new stores and product additions.

Myer

UBS observes Myer ((MYR)) is trading around all-time lows and well below the level where Premier Investments accumulated a 10.8% stake. The company has previously stated it did not intend to make a takeover bid.

UBS estimates a potential takeover could be more than 17% accretive to earnings per share, but remains wary of Myer's long lease tail (average tenure is over 12 years) and the significant pressure being placed on department stores globally from online competition. Macquarie, too, considers the stake strategic and does not expect the company to increase its position above 20%.

Costs

The company delivered savings in operating costs, emanating from staff and rent, and Citi suspects the savings related to staff are tied to weak sales trends in the core brands. Rent-to-sales ratios are expected to fall in FY18, given a better sales mix and some store closures. While praising the cost reductions achieved in FY17, Morgan Stanley now cautions that some brands are being run too lean.

The company is targeting reduced rent and/or incentives from landlords and has stated that as a direct result of unrealistic rent expectations Just Jeans and Portman's in Melbourne's Bourke Street will close in October, as part of an ongoing program to close unprofitable stores.

Macquarie expects the lease profile will support the company's ability to manage store profitability and estimates average lease duration declining to around 1.5 years, excluding new Smiggle and Peter Alexander stores.

FNArena's database shows five Buy ratings and one Hold (Morgan Stanley). The consensus target is $15.14, suggesting 12.9% upside to the last share price. The dividend yield on FY18 and FY19 forecasts is 4.3% and 4.9% respectively.
 

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.

Click to view our Glossary of Financial Terms