Australia | Mar 25 2021
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Rental reductions and government subsidies underpinned strong first half earnings for specialty retailer Premier Investments. Yet, how will growth stack up in the second half, or FY22?
-Growth in FY22 appears increasingly challenged
-Material margin benefits in shift to online
-Continuing to invest in a global online presence for Smiggle
By Eva Brocklehurst
Online growth is key to specialty retailer Premier Investments ((PMV)), driving expanded margins across its portfolio of brands as rental savings are incurred with fewer bricks & mortar stores.
First half earnings were ahead of most expectations, including the company's guidance, with revenue up 7% and retail earnings (EBIT) up 89%. Furthermore, momentum appears to have continued into the second half, Morgan Stanley points out, although comparable growth in FY22 looks increasingly challenged and a transition in CEO adds further uncertainty.
The first half numbers were boosted by rent and wage subsidies stemming from the pandemic, both in Australia and the UK. Government support aside, Credit Suisse ascertains the results are still a reflection of the strong portfolio of brands and online capability.
While the leader in the apparel brands, Peter Alexander, will cycle 22% sales growth in the second half, the broker notes other apparel brands will cycle a particularly weak sales period in the second half.
Gross margins missed Macquarie's estimates, despite the expansion to 65.4%, because of investment in inventory and building the supply chain, while Citi expects margins will structurally re-set 400 basis points higher, given the savings in rents and the shift to online.
Retail margins are, therefore, expected to settle at 17% by FY22 with most of the uplift in profitability driven by lower rents. Rent is expected to fall from 17.7% of sales in FY19 to 13.7% of sales in FY22. Half of this reduction in occupancy costs is stemming from lower rent per square metre while the other half is from the movement of sales to online.
Ord Minnett believes retail earnings margin expansion, stemming from the mix in channels to online and the mix in brands to Smiggle, will position Premier Investments well for a difficult comparable period ahead.
Moreover, growth options for 2021 exist in a business that is enjoying a lower rent to sales ratio as well as growth in its higher margin businesses of Peter Alexander and Smiggle. The broker, as a result, upgrades to Accumulate from Hold, finding the risk/reward now compelling.
Macquarie ponders wholesale exposure, which is immaterial at the moment, as a capital-light option for growth post the pandemic.
The broker notes the global store network for Smiggle has been reduced, with the closure of the remaining four stores in Hong Kong. Around 17 stores closed in the UK in the first half with the potential for a further 10-16 to close in the second half. Meanwhile, the company continues to invest in a global online presence for Smiggle.
Online sales growth in the first seven weeks of the second half was 61%, yet further afield Macquarie expects online penetration will be lower while physical store sales are enhanced relative to prior expectations.
All up, online penetration is expected to ease from peak levels albeit remain in excess of pre-pandemic levels. As a result margin benefits should still continue to materialise.
Citi expects online sales will increase to 30% over the next five years while the main uncertainty in Credit Suisse's view lies with the sales trajectory. The performance of Smiggle will be largely dependent on students returning to school in international markets.
Like-for-like sales in Malaysia in the first four weeks post a back-to-school announcement were up 143%, an encouraging number, yet the broker still is uncertain about a recovery in the Smiggle performance and outlook given the impact of the pandemic. As Smiggle is a significant driver of valuation, this cautious view supports Credit Suisse's decision to retain a Neutral rating.
There are two Buy ratings and four Hold on FNArena's database. The consensus target is $26.26, signalling 5.5% upside to the last share price targets range from $24 (Morgan Stanley) to $31 (Macquarie).
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