Australia | Sep 28 2020
This story features PREMIER INVESTMENTS LIMITED, and other companies. For more info SHARE ANALYSIS: PMV
The Premier Investments suite of retail businesses are resilient, with online an increasingly crucial driver of sales going forward.
-Disruptions to school attendance affect Smiggle sales
-Central DC provides several advantages
-Online growth allowing store closures at a faster pace
By Eva Brocklehurst
Retail trends remain positive for Premier Investments ((PMV)), although the company's performance over FY20 was substantially supported by wage subsidies and lower rent payments. Online was the critical driver of sales, accounting for 25.5% of total sales in the second half.
Nevertheless, excluding the one-off costs and benefits, Goldman Sachs points out the business has been able to demonstrate resilient sales in those locations that were less affected by the pandemic.
Cash flow over FY21 is likely to be constrained as working capital normalises and the delayed payment of the interim dividend will result in three pay-outs in FY21. The interim dividend will be paid September 30 while the final dividend is expected in January 2021.
Bell Potter anticipates FY21 earnings (EBIT) margins will contract around -100 basis points as JobKeeper unwinds, although this should be partially offset by the sales mix and favourable rental outcomes as well as the closure of less profitable stores.
Morgan Stanley notes Australasian like-for-like sales growth was 14% in the final 10 weeks of FY20. Peter Alexander sales were up 16%, with the broker suggesting the sleepwear retailer has benefited from consumers spending more time at home.
Amongst apparel brands, Jacqui E, Portmans and Dotti were affected by the trend away from formal clothing while Just Jeans and Jay Jays were relatively better performers.
While Premier Investments received a $33m benefit from government wage subsidies, Credit Suisse points out the cost saving is before one-off pandemic costs and should be considered in the context of a -$106m reduction in sales and at least -$14m of lost earnings.
Smiggle sales were weaker because of school closures, albeit up 9-37% in Western Australia, South Australia and Tasmania after children returned to school in those states. Therefore, Credit Suisse is cautious about the short-term outlook because of disruptions to school attendance in Victoria with the ongoing pandemic.
Still, online sales are considered the saviour of Smiggle, as the closure of up to 55 UK stores in FY21 suggests the company is accelerating its strategy for growth in margin-accretive online sales. Nevertheless, Credit Suisse considers this factored into the share price while Smiggle disappointed UBS and, as a result, the near-term sales outlook is lowered.
The final four Smiggle stores in Hong Kong will close by October 31 and an impairment is expected to be taken on all international store assets. Management could close up to 350 stores in Australasia, Goldman Sachs notes, depending on negotiations with landlords, although less than that number is ultimately envisaged.
Brokers point out the company's central distribution centre provides advantages such as a higher margins for online and less reliance on the store footprint. This in turn puts Premier Investments in a stronger position to negotiate on rent, Bell Potter asserts.
Citi believes the margin outlook is improving because of rent reductions and the shift to online. Margins are expected to expand to 15.1% in FY21 from 13.2% in FY19. The broker assesses the shutdown of stores throughout April and May provided an opportunity to test the limits of online in the absence of physical stores.
The outcome was positive and management is therefore increasingly confident it can shut stores at a faster pace, should rents not be deemed competitive enough.
Nevertheless, Citi is cautious about extrapolating the ability to grow total sales through the online channel, noting Smiggle and Peter Alexander would have higher sales transfer rates compared with more competitive categories such as women's clothing.
The broker expects online penetration of 20% in FY21, given shopping centre foot traffic is still -20-30% lower than the previous comparable period across not just Victoria but also NSW, Queensland and South Australia.
Over the longer term the outlook is less certain but Citi expects online will reach 31% of sales. Premier Investments is only one of two retailers under the broker's coverage which is expected to have higher online margins compared with in-store.
The other is City Chic Collective ((CCX)), which also has a high existing level of online penetration and relatively high margins. The broker assumes one third of Premier Investments' online orders are incremental to the business conducted in shops, which reflects a competitive nature of the categories.
While return metrics at first blush appear low, Bell Potter notes this is in part due to a significant lift in retained earnings arising from the pre-tax gain on the disposal of interest in the Coles Group ((COL)) back in FY07.
Hence, the broker expects return metrics will continue to improve and a step up is also likely if a material acquisition is made. Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $22.00 target. Goldman Sachs, also not one of the seven, has a Neutral rating and $18.60 target.
There are two Buy ratings and three Hold on the database. The consensus target is $20.40, suggesting 2.1% upside to the last share price. Targets range from $18.40 (Morgan Stanley) to $22.13 (Macquarie, yet to comment on the update).
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