Australia | Sep 23 2019
All domestic apparel brands improved market positions and achieved strong sales growth in FY19 for Premier Investments yet bellwether Smiggle turned in a soft performance.
-Strong sales growth across all regions so far in FY20
-Able to leverage the Smiggle brand with minimal capital commitment
-Wholesale growth for Smiggle provides the main positive impetus
By Eva Brocklehurst
Premier Investments ((PMV)) has been successful with its strategy over FY19, improving its profit outcomes on limited investment, although bellwether performer, Smiggle, turned in a soft performance.
In FY20 to date like-for-like sales growth is 5.2% and positive in all regions. The company's core brands are expected to continue providing momentum in the first quarter of FY20 because of the peak in the federal government's tax stimulus from August to October. However, Citi suspects this momentum will not be maintained and forecasts a -1.2% decline in core brands for FY20 in terms of like-for-like sales, given the strong FY19 base.
Apparel sales were up 6.9%, or 7.8% like-for-like, and Macquarie points out earnings visibility has improved. The Just Group brands achieved retail sales growth of 7.5% and constant currency like-for-like sales growth of 4.2% as well as a retail earnings (EBIT) margin expansion of 47 basis points. Other positive aspects include the delivery of the growth plan for Peter Alexander a year ahead of schedule, with sales up 13.3% in FY19.
Management continues to focus on ensuring a clean inventory position at the end of each period. Sourcing initiatives and disciplined markdowns are expected to improve gross margins in FY20.
Underlying growth slowed materially for Smiggle, to 1% in FY19, ex wholesale and concessions, from 23% in FY18. This was largely driven by a slowdown in the UK. Citi attributes this to the tough macro environment and the opening of 30-40 stores between FY16-18, cannibalising the existing network. Following a slowing down of new store openings, the broker acknowledges sales will stabilise.
The headwinds from Brexit culminated in Premier Investments exercising clauses enabling the breaking of leases for the majority of its UK store base. This will provide the flexibility to drive rents down over the next 2-3 years. Management has stressed that closing down stores is not a desired outcome.
Credit Suisse suggests debates regarding the UK exposure are becoming peripheral to the overall investment case and the company appears able to mitigate market weakness through rental reductions. The broker emphasises Premier Investments' ability to leverage the Smiggle brand with minimal capital commitment.
Moreover, Smiggle continues to expand its global footprint through third-party websites and has successfully launched on Amazon in France, Italy and Spain. Third-party relationships continues to be explored with other global operators, including Alibaba, with a focus on countries where the brand is not operating but remains in high demand.
The concession performance in Selfridges and Harrods in the UK remains robust and the brand has opened its first Asian concessions, with three trading in Singapore at the end of FY19.
Citi expects Smiggle will return to growth in FY20 as it sells into the wholesale channel, expecting retail sales of $474m by 2021, 5% ahead of management's target. Bell Potter also believes the company will achieve its target ahead of schedule. This profile would represent a 15% compound growth rate from FY19-23. New wholesale and concession channels are expected to contribute more than half of this growth.
Wholesale is the main positive in the outlook, Macquarie agrees, with around $35-45m in incremental retail sales projected for the first half. This remains the source of upside risk and the broker upgrades to Outperform from Neutral. Morgan Stanley also notes the aggressive global wholesale expansion, while Credit Suisse suggests profit from wholesale is likely to exceed UK store profitability in FY20.
The key years of growth for the wholesale channel will be FY20-21, Citi observes. Smiggle will be filling the channel over this period as new retail partners order stock for the first time. However, the broker maintains a conservative view over the longer-term for wholesale.
Citi ascertains the runaway success of the specialty store experience for Smiggle in new markets cannot be achieved in the wholesale environment, given the lack of fit-out and dedicated labour.
The company's strategy of clarifying its market position for each of the apparel brands and further investing in products and merchants has delivered results, in Macquarie's view. The focus has also be on store profitability with 35 stores closing over the last 12 months and a total of 138 closing over the last seven years.
Citi acknowledges, while there is an initial loss of sales at the headline from these closures, this has likely boost productivity across core brands. The pace of store closures is expected to continue, and the broker factors in 11 closures for FY20 and eight for FY21.
Citi downgrades to Sell, following an excessive response in the share price to the 3-4% earnings upgrade now incorporated in its forecasts. The share price has lagged retail peers in the current cycle but is now trading at a premium to discretionary retail peers. the broker considers the re-rating potential is limited as incremental earnings upgrades are required to drive further outperformance.
Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, goes the other way, upgrading to Buy from Hold with a target of $20.80. The broker believes a materially improved outlook for Smiggle, continued strength in Peter Alexander and the apparel brands, as well as an undemanding valuation for Just Group, underpin the business.
The database has three Buy ratings, one Hold (Morgan Stanley) and one Sell (Citi). The consensus target is $19.23, suggesting 6.1% upside to the last share price. This compares with $18.01 ahead of the results.Targets range from $16.80 (Citi) to $20.56 (Credit Suisse).
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