Australia | Mar 26 2019
Premier Investments is accelerating its emphasis on the Smiggle brand as it expands an online and wholesale business globally, although sales growth for established Smiggle markets eased back in the first half.
-Online-only markets will require greater investment in Smiggle brand
-No concession partnerships yet but negotiations continue
-Apparel brands to cycle tough comparables in the second half
By Eva Brocklehurst
Smiggle continues to underpin the outlook for Premier Investments ((PMV)), although the company's apparel brands provided much-needed strength in the first half. The company's strategy for its children's stationery and related accessory business Smiggle is moving to a focus on online and wholesale, which means there is more emphasis on the brand and less on the ownership of the physical assets.
The first half result was in line under difficult market conditions, Credit Suisse points out, and in several respects the result puts a spotlight on the changes occurring in international retailing. Online sales were up 35.2% and 12.9% of total sales in the half.
The broker believes the market is yet to fully appreciate the long-term growth platform being created by Smiggle in the move towards online and wholesale distribution. The intention is to leverage someone else's investment in established store-based trading and online distribution. The broker calculates the current strategy provides for a sevenfold increase in the available consumer base versus the current distribution.
Yet Citi points out this is yet another change in strategy for Smiggle, and remains sceptical about whether the level of sales growth can be considered sustainable. Hence, Smiggle warrants a lower multiple and remains the reason why Citi has a Sell rating in place for the stock.
Smiggle's sales trajectory has slowed, admittedly, which requires apparel to step up to the plate, yet Credit Suisse finds nothing materially wrong with a slower rate of growth – 5% in the first half – other than difficult trading conditions in Australia and the UK. Australian toy brand closures, discounting in department stores in toys and stationery and UK's Brexit ordeal provided a soft background.
The logic in the company's strategy appears sound, amid lower entry/lease risk and higher earnings (EBIT) margins and returns, Macquarie asserts. Credit Suisse also finds the deferral of an aspirational revenue target of $450m to 2021 or 2022 is simply reflecting the lead time for implementation of the company's strategy. Materially, the broker believes the market is yet to factor in the more favourable economics that the strategy entails.
First wholesale and online arrangements are expected to start in July 2019. Over 100 wholesale stores are expected to be trading from July in Korea, Thailand, Indonesia, the Philippines and the Middle East (UAE), with the launch in Canada of a wholesale channel in mid to late 2019.
In continental Europe Smiggle will launch with Amazon in France, Italy, Germany and Spain. Bell Potter notes no concession partnerships have been announced, although negotiations continue. Online-only markets will require greater investment in brand, Macquarie points out, as a strong store presence has undoubtedly contributed to online success in other markets.
Smiggle sales in the first half were -16% below Bell Potter's estimates, as trading in the UK was significantly affected by Brexit. Australasia was weighed down by challenging retail conditions and tough comparables while strength in Asia continued.
Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, eases back medium-term growth forecasts for Smiggle and reduces the target to $17.65 from $19.60. The broker maintains a Hold rating based on the Brexit uncertainty and domestic headwinds.
UBS still expects Smiggle to launch European concession stores and enter the US in the future. The broker now forecasts around 585 standalone stores, 90 concession and 110 wholesale Smiggle stores within a decade. At that point, Smiggle is expected to make up around 62% of retail earnings versus 45% in FY19 estimates.
Meanwhile, the company's apparel brands performed well, with sales growing 7% in the first half. This appears to have been significantly supported by Just Jeans and Jay Jays. Deutsche Bank describes the apparel result as exceptional, as it defies the general trend in the market.
Citi expects the acceleration in the core brands during the first half will moderate in the second half as the company cycles tough comparables, increased volatility from the NSW and federal elections and increased cannibalisation from online business.
While apparel brands may be structurally challenged, UBS observes momentum is still improving as the company closes unprofitable stores, achieves rent reductions and increases direct sourcing.
Morgan Stanley flags the fact that the results were in line with its forecasts in every aspect, while was no specific outlook provided. The company has closed 16 stores in total, including a Just Jeans flagship store, which Morgan Stanley believes sends a strong message to landlords.
The broker values Smiggle on 14x multiple, Peter Alexander on a 9x multiple and Portmans and Jacqui E on a 7x multiple, slightly below the average multiple for retailers. The broker considers Dotti, Jeans West and Jay Jays are more mature businesses and face the greatest pressure from international retailers.
Cost management was a feature of the results and Macquarie notes gross margin was solid in the context of the tough market conditions, declining just -14 basis points to 63.0%. Margins also benefit from key FX hedging policies, which facilitated merchandise planning. Sourcing initiatives also provided impetus.
FNArena's database has three Buy ratings, two Hold and one Sell (Citi) for Premier Investments. The consensus target is $18.03, signalling 14.1% upside to the last share price. Targets range from $15.60 to $19.80 (UBS). The dividend yield on FY19 estimates is 4.3% and on FY20, 4.8%.
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