Is Super Retail Group Now Super Cheap?

This story features SUPER RETAIL GROUP LIMITED. For more info SHARE ANALYSIS: SUL

First half results from Super Retail Group have triggered heavy selling pressure, but analysts largely agree the results had more going for them than meets the eye.

-Super Retail Group’s first half earnings of $182.8m fell -2% short of market consensus
-The company faced an uphill battle against FY21 results given the exclusion of Boxing Day in H1
-On balance, analysts have turned more positive in contrast to heavy selling pressure on the day of release

By Danielle Austin

Super Retail Group’s ((SUL)) first half results appear to have disappointed the market, with the results release triggering a -9.5% share price fall on the day of the release. The company reported revenue of $1.71bn in the first half and earnings of $182.8m, which fell short of consensus forecasts of $186.8m.

Compared to the previous comparable period, the company delivered sales, earnings and profit declines of -4%, -33% and -36%, but given the reporting period for the half ended on December 25 the typically strong retail period following Christmas, including Boxing Day sales, were not accounted for in first half results unlike in the previous year.

Analysts suggest including Boxing Day sales in first half results could have added a $27m revenue benefit, and driven earnings for the half up $7m to beat consensus forecasts at $189.8m. Further, the inclusion of Boxing Day in the previous year’s first half created a tough comparable result but may now offer upside to second half forecasts.

Investors and traders were likely also spooked by gross margin compression in the half that saw margins decline -100 basis points year-on-year to 46.7%, but current margin levels suggest uplifts gained through the last two years were retained as margins remain up on pre-covid levels, and 170 basis points higher than the first quarter of FY20.

The company reported a like-for-like sales decline of -5.9% in the first half, but FY21 results were a tough comparable to cycle off and like-for-like sales were up 15.4% on FY20 results.

Exposure dictates results in early second half

Super Retail Group is the overarching banner for retail stores Supercheap Auto, Rebel Sport, BCF and Macpac. The company already exhibited some rebound in the early second half, with group like-for-like sales up 6.0% in the first six weeks of the period.

Brand-by-brand, Rebel Sports’ higher shopping centre exposure drove a -2.4% decline in like-for-like sales in the first six weeks of the second half as increasing covid cases drove subdued foot traffic.

Supercheap Auto and BCF, both brands with less shopping centre exposure, fared significantly better with positive like-for-like sales growth of 9.3% and 12.2% respectively. Alongside better foot traffic exposure, both brands likely benefitted from higher in-stock positions for key categories. Continuing decline in covid cases should result in increasing foot traffic over the second half, analysts suggest, benefitting the Rebel Sport brand.

Online sales also grew 64% in the first half, contributing $389m in sales, suggesting a shift in consumer behaviours. This growth included a 109% increase in click and collect sales.

Inventory build likely second half driver

The company continued to invest in inventory build in the first half to further buffer brands from the risk of supply chain constraint, particularly building Supercheap Auto and BCP inventories. As noted, inventory of key demand items already benefitted the company early in the second half, and analysts largely expect a strong inventory position will support growth moving forward.

The company closed out the first half with inventory up 42% year-on-year, to a total value of $909m. Further, the company retained flat levels of aged inventory which, according to analysts, should alleviate some investor concern about the costs of inventory build.

Of the six brokers in FNArena’s coverage who reported on Super Retail’s result release five are Buy rated or equivalent, with only Macquarie holding a Neutral rating as well as the lowest target price of $12.13. At the other end of the spectrum, Citi offers the highest target price of $14.50, while the average target across these brokers is $13.675.

Upgrading to an Add rating from Hold, Morgans finds the -9.5% share price decline in the wake of the company’s first half results release an opportunity for investors, with the quality of the business too high for the current stock price. Morgans decreases its earnings forecasts -1.9% and -1.0%, and lowers its target price to $13.60 from $13.80 accordingly.

Although retaining its Neutral rating and decreasing its target price to $12.13 from $13.18, Macquarie did upgrade its earnings per share forecast for FY22 by 1.1%. Macquarie experts warn of gross margin compression in the second half as the company feels the cost pressures of supply chain constraints.

Bell Potter, not included in brokers monitored daily at FNArena, has kept its Hold rating with an unchanged price target of $12.65 while Jarden, equally not in the daily coverage, has upgraded to Overweight from Underweight, while lifting its price target to $12.40 from $11.70.

Analysts at Jarden have upgraded their forecasts and have adopted the view the worst is over and Super Retail shares now present compelling valuation in light of re-opening economies and investment opportunities for the company.

On updated consensus forecasts, the shares now offer an implied dividend yield of 5.7% (forecast 64.3c for FY22) and 5.2% for next year (forecast 59.5c for FY23).

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