Australia | Sep 21 2018
Smiggle continues to lead the brand portfolio of Premier Investments and the company has renewed its focus on online and new markets.
-Smiggle to focus on online, concessions and wholesaling
-Focus on concessions linked to challenges in store-based brands
-Labour costs and digital investment rising
By Eva Brocklehurst
Premier Investments ((PMV)) posted robust FY18 results, largely forged on the back of its key brands Smiggle and Peter Alexander. Smiggle and Peter Alexander are the highest margin and highest growth brands in the company's portfolio and now account for 43% of retail sales.
Cash flow was the highlight for UBS, while margins were assisted by rental reductions and changes in mix. Women's apparel brands generated positive like-for-like sales growth in the second half, offsetting what appeared to be slower sales in Peter Alexander and Smiggle.
UBS suspects Peter Alexander's sales in the second half were affected by newly-opened stores, while management has also pointed to a weaker half for Smiggle UK/Ireland as a result of Brexit uncertainty. Online business is very strong in the UK and sales in UK/Ireland for Smiggle were up 29% for the first five weeks of FY19.
Credit Suisse believes the results for the rest of the portfolio were overshadowed by developments at Smiggle, where growth objectives have been accelerated. The broker points to a -$30m impairment to casual-wear brands, which received little comment from the company, and gross margins were weaker than forecast, reflecting competitive retail conditions in the second half.
Credit Suisse concedes Premier Investments is mitigating store-based retailing risks, and its women's brands appear to have a tight network, concentrated on strong fashion locations. Nonetheless, Jay Jays and Just Jeans contradict this tight network in that they have an excess of 200 stores each in Australasia. The company does not appear to have moved to free delivery to the same extent as competitors and the store network remains important in mitigating the cost of returns.
Smiggle has now established its UK footprint and Deutsche Bank believes operating leverage is more than compensating for the pressures on margin in the apparel brands. Online originated sales are at 15% of total UK sales and the company is optimistic about developing online markets because of the more favourable cost structure of a centralised online model.
There is a change in strategy at Smiggle, which is moving to focus on concessions, wholesaling and third-party online partners. The company has made two strategic decisions.
One aspect includes concession stores in iconic retailers, excluding Australasia, and wholesale relationships for new Asian markets. The second is that the entry into European markets is likely to be broadened and include France, Spain, Italy, Germany, Netherlands and Belgium over the medium term. UBS now forecasts 1055 Smiggle stores and around $40m in wholesale sales over the next decade, assuming the brand is also launched in North America.
The concession element, Credit Suisse believes, can be linked to the challenges of store-based retailing. Concessions effectively concentrate the store footprint in very high traffic locations and there is a more flexible cost structure which helps overcome entry barriers, an issue in new continental European markets.
The concession payment effectively substitutes rent and the advantages of a smaller physical footprint mean it can derive similar earnings margins versus a stand-alone store, with a significantly lower level of capital expenditure.
The company opened a Smiggle concession in May at Selfridges Oxford Street which Credit Suisse notes, unsurprisingly, is trading in the top clutch of UK stores by turnover. Yet Citi urges caution regarding extending the metrics of the Selfridges concession to any broader roll-out.
The third prong, the wholesale model, is the market in which the company may not otherwise have a store presence. Credit Suisse presumes the company is well aware of the brand integrity and “grey” market risks associated with this model.
Credit Suisse suspects the market may be missing the impact of increased wage pressures in Australia. Retail awards have been increased by 3.3% and 3.5% over the past two years, respectively, and the company is also in the process of a new enterprise bargaining agreement, so labour costs are a challenge to store-based economics.
Then there are the set up costs in Europe. Credit Suisse makes slight downgrades to FY19 and FY20 forecasts, however upgrades FY21 and beyond to reflect the acceleration in the Smiggle strategy.
Citi suspects rising labour costs and the digital investment will carry over into FY19 and forecasts cost growth per square metre of 4%. The broker downgrades the stock to Sell from Hold on valuation grounds.
Retail operating earnings forecasts (EBIT) are reduced by -9% for FY19 and -7% for FY20 because of higher operating costs. The broker believes the new global role-out strategy introduces risk into the company's proven model and this dampens long-term forecasts.
Deutsche Bank also downgrades, to Hold from Buy, yet notes Smiggle's contribution is growing and costs are being controlled, while there is an encouraging sales trend in the apparel brands.
FNArena's database shows five Hold ratings, and one Buy (Macquarie, yet to comment on the results). The consensus target is $17.26, suggesting -4.4% downside to the last share price.
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