Despite a tough domestic retail environment, Premier Investments ((PMV)) continues to maximise trading outcomes for its portfolio of brands. The driver of growth in the company’s retail footprint is Europe, where Smiggle stores will be launched in the Netherlands in the second quarter of FY19.
Flagship brands Smiggle and Peter Alexander performed ahead of expectations in the first half and online sales in the UK exceeded management’s forecasts. Legacy apparel brands Portmans, Jacquie E and Just Jeans also performed strongly.
First half results were supported by like-for-like sales growth, up 2.4%, the online contribution as well as cost reductions. Like-for-like sales grew in all brands other than Dotti (fast fashion) and Just Jeans, although UBS notes the latter has turned positive since the balance sheet date. Also, new management at Dotti is targeting a turnaround in the first half of FY19.
The stock is a key sector pick for Macquarie, underpinned by the potential in Smiggle as it rolls out globally in Europe and the US/Canada. Peter Alexander is solid while the momentum in legacy brands is improving, although risks from domestic competition continue. Macquarie also notes the strong omni-channel capability, where the company is investing ahead of the curve.
The result highlights for Deutsche Bank the resilience of the group in a weak market for apparel. Smiggle and Peter Alexander are the highest margin and highest growth brands and now account for 45% of retail sales.
The Smiggle UK footprint of 125 stores has firmly established the company’s global credentials and this represents a tipping point in scale, whereby operating leverage is more than compensating for pressures elsewhere in the portfolio, the broker asserts.
Credit Suisse agrees Smiggle continues to underwrite value and its significant online growth suggests a potential mix change in channel along with the UK expansion.
Still, the broker remains wary that the company’s online model in Australia does not subsidise delivery fees and returns, unlike pure-plays online. The company’s argument with respect to the latter indicates returns to store provide a competitive alternative to free returns and the broker maintains a watching brief in this regard.
Margins
Gross margins were under pressure from apparel discounting, which more than offset the positives in the shift in mix to Smiggle and Peter Alexander, Citi notes. Traditional bricks and mortar sales declined -0.8% while online sales grew 72%. While gross margins declined, the company managed to lift its earnings (EBIT) margin on the back of lower operating costs.
Citi points out that over 80% of the cost savings came from tight control of staff levels. There are other factors at play, too, as the mix is shifting online, which has lower staffing costs as do Smiggle stores, and the company has held wage growth in check.
The company has made a strong start to the year, although Morgan Stanley notes its second half is reliant on a fourth quarter which includes the variable winter season for apparel and Mother’s Day. While competition remains intense in core brands, the broker does not bank on an immediate improvement to gross margins. Wage cost increases are expected to hold back costs/sales improvements compared with the first half.
Rents
UBS notes the company has made progress in negotiating reductions in rent and first half rent/sales fell -34 basis points. Given rapidly increasing online sales and reports of substantial reductions in rent, the company is considered well placed to negotiate further reductions across its domestic apparel portfolio. Morgan Stanley also points to the hard line the company has taken with landlords and its focus on reducing rent as a percentage of sales.
Valuation
UBS believes a discount to market for the core brands is justified and, given where international peers are trading, believes potential fair value is $15.62-17.53 per share.
A valuation issue arises in relation to what the company will do with its 10.8% stake in Myer ((MYR)). UBS estimates a takeover could be more than 17% accretive but remains wary of the long lease tail for Myer, where the average tenure of stores is over 12 years.
Macquarie believes the valuation is undemanding in the context of the global growth opportunities, although limited value is being ascribed to the legacy portfolio.
Citi downgrades to Neutral from Buy because of the rise in the share price over the past four months. The broker remains cautious on a 12-month horizon because of slow sales growth, and the potential distractions from the stake in Myer. The broker’s bull case shows upside to $19.68 (Citi has a target of $16.40) if a new country can be found for Smiggle and there is a -10% reduction in rents.
FNArena’s database shows three Buy ratings and three Hold. The consensus target is $15.96, suggesting 3.6% upside to the last share price targets range from $13.20 (Morgan Stanley) to $17.30 (UBS).
