As the pandemic put retail focus squarely on local leisure activities and home-based consumption, Super Retail ((SUL)) was expected to perform well at the start of FY21. However, brokers were surprised by the extent of the strength.
The re-opening of Melbourne and a domestic-centric festive season are also likely to mean sales accelerate over the December quarter. That said, the company did not provide guidance and cautioned that trading to date should not be considered an indicator of the full year.
Credit Suisse expects Super Retail will benefit from elevated domestic leisure expenditure for a couple of years. The automotive (Supercheap Auto) and sports (Rebel) divisions have market-leading positions while the company’s digital presence is expanding.
Macquarie is more circumspect, preferring to wait for more information on just what level of sustainable earnings the market is willing to capitalise, and whether trends normalise when international borders re-open.
Like-for-like sales were up 25% in the first quarter amid particular strength in BCF, up 61%, Supercheap Auto, up 21%, and Rebel, up 16%. The underperformance in Macpac, where sales were down -1% in the quarter, was largely attributed to the temporary closures of stores in Melbourne and Auckland.
The closures, including 94 of the company’s stores in Melbourne, weighed particularly on Rebel and Macpac, which experienced like-for-like declines in momentum commensurate with the lockdown period. If Melbourne’s closures are excluded, Citi estimates like-for-like sales growth was 22% at Rebel and -4% at Macpac.
Online sales growth exceeded 100% in each brand, Credit Suisse notes, because of a significant investment in digital capability undertaken over recent years. Capital expenditure guidance has also increased to $100m as the company intends to reinvest some of the benefits accrued from the pandemic into its digital offering.
Re-Opening
Ord Minnett explains strong demand for sporting goods put pressure on global supply chains and so the company reduced promotional activity, which meant sales growth slowed, although margins expanded.
The company is placed to benefit from the re-opening of state borders while international borders remain closed. This should benefit Supercheap Auto as well as outdoor camping categories in BCF.
Ord Minnett also points out the business will cycle undemanding comparables in the December quarter and early in the March quarter, given the bushfires and regional weakness that weighed in late 2019 early 2020.
This mostly affected BCF but also Supercheap Auto, which has a regional skew. Bell Potter strengthens forecasts, particularly for Supercheap Auto and BCF because of the leverage to consumer trends.
While recognising conditions are favourable, the broker, not one of the seven monitored daily on the FNArena database, is mindful of an eventual re-balancing towards international travel and, given valuation, retains a Hold rating with an $11.20 target.
Margins
The main positive taken from the company’s commentary was gross margins, up over 200 basis points and supported by reduced promotional intensity. This is positive for earnings and Citi expects 29% EBIT growth in FY21.
However, the broker is mindful this rate will then be difficult to cycle and growth should “normalise” over FY22. Morgans agrees, as inventory improves and the company invests in price to protect its position over the longer term, gross margin expansion will be tempered.
The broker asserts current sales rates cannot continue into the second half although the trends remain positive. UBS, too, expects a significant decline in growth after the third quarter (March) as sales have probably been pulled forward and promotional intensity will increase.
FNArena’s database has five Buy ratings and two Hold. The consensus target is $12.06, signalling 4.8% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 4.8% and 4.6%, respectively.
