Super Retail’s Hidden Upside

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

Following a second half trading update by Super Retail, brokers remain upbeat and point to positive changes that may have been overlooked during the pandemic.

-Super Retail Group’s second half trading update stronger than expected
-Five of six brokers in the FNArena database are Buy-rated or equivalent
-Positive changes overlooked with the focus on covid impacts
-Elevated inventory concerns overstated 
-The macroeconomic outlook may weigh

By Mark Woodruff

A second half trading update by Super Retail ((SUL)) was stronger than most brokers anticipated.

As no lockdown tailwinds were blowing over the period, Ord Minnett believes the company deserves increased recognition and raises its rating to Buy from Accumulate.

As a result, there are now five of six covering brokers in the FNArena database with a Buy or equivalent rating and an average 12-month target price of $13.27, which suggests 25% upside to the latest share price.

The company has brands that include Supercheap Auto, Rebel, BCF and Macpac in 700 stores across Australia and New Zealand.

Overall, like-for-like sales increased by 4.4% and the gross margin was in-line with the first half. Given commentary in February around some moderation in gross margins, Overweight-rated Jarden believes a stable margin is a good outcome. The broker, not one of seven updated daily in the FNArena database, also expected slowing second half sales.

The trading update also demonstrated to Citi continued strength in sales, particularly for Supercheap Auto and BCF. This strength is thought to expose exaggerated market concerns around the company’s elevated inventory position. UBS agrees and believes the inventory position has been a support for sales as availability issues remain for some peers.

Apart from Rebel, the trading updates were stronger than Credit Suisse had forecast for all brands. Highlights included a comparable store sales increase of 8.4% year-on-year for Auto and 7.6% for BCF. While the company had increased overall inventory investment in the first half, Rebel’s performance was impacted by limited stock availability, particularly in footwear.

Meanwhile, management continues to point to growth opportunities in expanding its store network and from increased online penetration. Only once supply chain disruptions pass and trading conditions normalise will capital management be considered.

Inventory

Super retail has held elevated levels of non-perishable inventory due to the disrupted supply chain since FY21.

While this has concerned some market participants, Citi points to management’s track record of sourcing private label product and ongoing robust sales trends. As the first half accumulation of inventory was mostly concentrated in Supercheap Auto and BCF, there’s considered to be minimal ageing risk.

Despite the recently limited footwear stock availability, Macquarie points out Rebel is benefitting from improved foot traffic, while Macpac has inventory in place for the key winter period and the expected upside from the reopening of international travel.

Positive changes hidden by covid impacts

In the last two years there have been 2.4 million members added to Super Retail’s loyalty program, with club benefits driving visitation and club members spending more than other customers, notes UBS.

Ord Minnett also sees the loyalty program as a competitive strength, with 69% of sales made to 8.7 million loyalty members, and notes sales growth in the program is double the overall sales growth of the business.

Another positive change, according to UBS, is store network optimisation including a network quality upgrade. The broker cites the example of the Rebel RCX stores, which have an interactive format focusing upon sporting experiences. Citi agrees and believes longer-term growth for Rebel should be supported by the rollout of the RCX concept to the top 25 stores (up from ten currently) and upgrading of the next 30 best stores.

Some caution on the outlook

While the Neutral-rated Macquarie upgrades its earnings forecasts as a result of the trading update, its target price falls to $10.57 from $12.13 as the applied valuation multiple was lowered to reflect current macroeconomic conditions for consumer discretionary stocks.

Jarden (Overweight) also noted the macroeconomic backdrop is becoming more challenging, which creates growing risk for the company coming into FY23.

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