Australia | Sep 27 2021
This story features PREMIER INVESTMENTS LIMITED, and other companies. For more info SHARE ANALYSIS: PMV
Optimism prevails at Premier Investments, which is ready for an expected surge in customers as stores re-open and a fresh new year beckons
-Brands to benefit from stores re-opening & online expansion without need for large investment
-Will Premier Investments' earnings growth be affected by margin decline?
-Or have retail margins stepped up anyway because of increased online penetration?
By Eva Brocklehurst
Despite lockdowns infringing on store sales throughout FY21, Premier Investments ((PMV)) remains optimistic as FY22 unfolds, procuring inventory in anticipation customers will be trooping in when stores reopen.
FY21 results delivered record sales across both Peter Alexander and apparel brands as well as online, despite the lockdowns. Yet the impact of school closures was severe in the case of Smiggle for which FY21 sales were down -16.8% globally.
By mid May all stores in Europe had resumed trading and Smiggle achieved double-digit like-for-like sales growth during those periods when school was operating. Like-for-like sales in FY22 are currently up 69% in the UK, 64% in Ireland and 131% in the Middle East wholesale channel. The Australasian business, therefore, is expected to recover in a similar way.
In the first seven weeks of FY22 Premier's global sales are down -9.5%, largely as a result of lockdowns, while strong online sales and a rebound Smiggle Europe have provided a counter point. Brokers assess the business is well-positioned for such uncertain times because of the online capability, strong inventory and cash balance.
While the stock is trading at a premium to discretionary peers, Citi considers this reasonable because key brands will benefit from reopening and the increasing adoption of online shopping without the need to reinvest significantly.
Macquarie, too, assesses a net cash balance of $376.5m will support plans to expand the distribution centre in 2022 while the current macro environment provides opportunities.
Bell Potter expects a rebound will occur in Australasia in FY22 across apparel brands as well as Smiggle. All five apparel brands achieved like-for-like sales growth of 18.7% in FY21. Peter Alexander outperformed, with like-for-like sales up 34.7%.
Premier has consistently exceeded Morgan Stanley's expectations over the last 12-18 months, amid solid execution. Yet earnings growth in FY22 may be challenged by lower demand and a normalisation of margins, the broker suggests, while the change in CEO is adding further uncertainty.
Goldman Sachs highlights the impact of one-off items as well as store closures on FY21 earnings and expects the first half of FY22 will be subdued because of the lockdowns in Australia. The broker is concerned about the outlook for Smiggle, amidst permanent store closures, as well as the ability of Peter Alexander to cycle previous stellar growth rates.
Premier has closed 46 stores in the last 12 months and 158 stores over the past seven years, Macquarie points out, as it homes in on individual store profitability because of the growing preference for customers to purchase online.
The broker also notes over 75% of the global store network is either in holdover or with leases expiring in less than 12 months, providing flexibility to review the network.
Profitability at a store level is driving decisions about optimising the physical store network and Credit Suisse agrees that as online sales attract a higher profit margin, and assuming the shift to online continues, there could be further downward pressure on rent. Still, it will be unclear as to whether elevated promotional activity affects in-store trading until the second quarter.
Regardless, Goldman Sachs suspects gross profit margins are likely to decline as the promotional environment normalises throughout 2022. Macquarie also expects FY21 will turn out to be a record year in terms of margins, given the concessions the company obtained, and expects margins will normalise in FY22 along with earnings (EBIT).
Gross margin was 64.3% in FY21 and resulted in a 25.1% increase to gross profit to $927.9m. Credit Suisse forecasts a return to pre-pandemic gross margins in FY22, assuming a margin benefit from sales recovery in Smiggle is offset by promotional activity in apparel.
Ord Minnett slates gross margin expansion of 50 basis points in the first half, easing back over the long-term, and further notes rents were the major driver of margin expansion in FY21, while Citi asserts retail EBIT margins have made a step-change to the top side from pre-pandemic levels because of the increased penetration of online sales and rent renegotiation.
Management's argument is that rent should fall to preserve in-store profitability and as a result the broker expects Premier to retain around 380 basis points of EBIT margin benefit from rent by FY23.
Bell Potter considers Peter Alexander unique in the market and positioned to expand offshore, although acknowledges a recovery in Smiggle tops management's priority list. The broker, not one of the seven monitored daily on the FNArena database, upgrades to Buy from Hold with a target of $31.25, assessing a re-basing of FY22 earnings is priced in and robust growth should resume from FY23 onwards.
Goldman Sachs, also not one of the seven, is at the other end of the spectrum, maintaining a Sell rating with a $23.40 target. The broker believes the stock is trading at a premium to its peer group on the basis of the growth outlook as well as excluding the market value of associates – Breville Group ((BRG)) and Myer ((MYR)).
The database has somewhat of an each way bet with three Buy ratings and three Hold. The consensus target is $30.20, suggesting 3.6% upside to the last share price.
See Also, Premier Investments: All About The Margin on June 16, 2021.
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