Super Retail ((SUL)) has been hit by the recent bushfires, downgrading expectations for its ‘outdoor’ operations. Like-for-like sales growth slowed to nil over November/December and the company has now flagged first half earnings (EBIT) of $113-115m, down -8% on the prior corresponding half.
While the update is well below most broker expectations, Credit Suisse suspects investors will look through the fire-related impact. Nevertheless, the broker asserts a reflection on the longer-term risk implied by climate change is required. More frequent and extreme events have the potential to impact retail performance.
There remain near-term risks for Super Retail with respect to the second half. Expenditure on camping-related activities is likely to be soft and inventory elevated. That said, the broker believes Super Retail is not alone in terms of underperformance in the first half.
The prospect of Super Retail being more susceptible to external factors such as natural disasters and competition has also unsettled CLSA. This has led the broker, not one of the seven monitored daily on the FNArena database, to downgrade to Underperform from Buy and reduce its target to $9.80 from $13.15.
The main issue UBS confronts is the extent to which the drivers of the current downgrade are one-off. Assuming sales rates from the first 16 weeks were maintained, the broker assesses earnings would have been $10-15m higher if it were not for the devastating impact of the fires on the subsequent 10 or so weeks.
Moreover, fire-related closures are likely skewed to January, as opposed to December, Morgan Stanley points out, and conditions and demand remain of concern, as is the longer-term impact on regional communities and tourism. There is also the risk of higher promotional intensity after such a challenging period.
BCF, Macpac
BCF and Macpac sustained the majority of the impact and were the main sources of concern for brokers as execution risks remain elevated. BCF had more than 50 stores where sales activity was affected by the bushfires and around 40% of BCF stores have been directly disrupted by the fires and drought in NSW. Like-for-like sales growth for BCF contracted by -0.5% in the first half and Macpac’s by -7%.
Management did not provide a trading update for the second half to date but these businesses are expected to remain under pressure. There is also the risk of higher promotional intensity after such a challenging period. The company decided not to pass on FX-related price increases from the winter period at Macpac.
Credit Suisse is surprised by the decision to reduce promotional intensity to mitigate costs rather than increase the retail price. As a consequence, this has reduced clarity in respect of the performance of the Macpac Adventure Hub stores and expansion strategies. Despite this, the stock is not priced for growth and Credit Suisse suspects, therefore, there is not a lot of downside risk.
Positive Aspects
Meanwhile, Supercheap Auto like-for-like sales growth was 2.4% and Rebel Sport was relatively resilient, with growth of 3.3%. While acknowledging the near/medium-term uncertainty associated with fire and drought Morgan Stanley highlights the strength of the automotive and sports divisions.
The broker believes the stock’s -50% discount to the ASX industrials ex financials is excessive. UBS also notes second quarter gross margin trends improved and points to the expected growth in earnings for Macpac in the second half.
All up, UBS is positive about the balance sheet, scope for industry consolidation, improving cash flow and the attractive valuation. On the other hand, Ord Minnett would be more constructive at a lower share price and when there is greater evidence of improvement in the outdoor divisions.
Morgans agrees the timing around a recovery in outdoor is uncertain, although prefers to look through these events, highlighting the reasonable valuation. That said, the broker does not believe the February results update will reveal any meaningful reversal of recent top-line trends and now expects an earnings decline of -2.2% in the second half.
FNArena’s database has four Buy ratings and two Holds. The consensus target is $10.07, suggesting 4.8% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 5.0% and 5.3% respectively.
