Premier Investments (ASX:PMV) has proven to be one of the best-performing retailers during both buoyant and challenging consumer conditions. Based on its recent sales results, the rising cost of living in Australia has yet to have an impact on PMV’s financials. Equally as important are the Company’s international expansion plans for their key brands. These include Smiggle and Peter Alexander. Following the recent release of its full-year results, we researched PMV in The Dynamic Investor to assess the prospects for a further recovery in the share price.
About Premier Investments
Premier Investments owns global retail brands Smiggle and Peter Alexander as well as a portfolio of apparel brands in Australia & NZ. Smiggle and Peter Alexander are the highest-margin and highest-growth brands and currently account for ~45% of group sales.
• Smiggle is a retailer selling bags & accessories, pencil cases, food & drink, stationery, toys and school supplies. Smiggle has a network of 306 stores (including concessions) in major developed countries/regions. These include Australia & NZ, UK & Ireland and Asia (Singapore, Hong Kong & Malaysia). A key aspect of the Company’s strategy is to expand into Europe and increase both the portion of online sales (currently ~23% of overall group sales) and store network.
• Peter Alexander is a retailer selling sleepwear (men, women & children), homeware and beauty products.
• The Company also operates five core apparel brands in Australia & NZ. In order of FY22 sales contribution, these comprise Just Jeans, Jay Jays, Portmans, Dotti and Jacqui E.
Key Fundamental Drivers
Several Factors Supporting Margins
PMV has delivered significant gross profit margin (‘GM%’) expansion in recent years. The performance in FY22 was ahead of expectations. The +52 basis points expansion in GM% in FY22 was driven by quality merchants leading to more full price sales, currency hedging and an advantaged supply chain.
Premier’s inventory and gross profit margin levels have been resilient to date. While inventory is elevated, the quality of stock is high and gross margins are yet to be impacted as the competitive environment remains rational.
Given the potential for promotional activity to escalate in light of the prospect for weakening consumer confidence levels, it is unlikely that that the GM% will be under pressure in FY23. Accordingly, we expect GM% to decline from 64.8% in FY22 to ~63% in FY23 and, for FY24 and FY25, remain broadly in line with the average pre-COVID GM% over the 8-year period between FY12 to FY19.
Overall, EBIT margin in FY23/24 is expected to remain above pre-COVID levels (~15% in FY19), due to further online penetration (a higher margin channel) and continued low rent costs, as the balance of power remains with tenants.
Medium Term Outlook for Smiggle Remains Appealing
Smiggle delivered global sales of $261.2m in FY22. This was up 24.6% on FY21 (+ 61.7% in 2H22). Sales growth was achieved across all global markets. Australia and NZ performance has been very strong delivering total and LFL growth across both markets and all states for 2H22 and FY22. Europe sales performance has continued to rebound and surpass expectations, particularly in key tourist stores with global travel resuming. LFL sales growth performance in Asia has started to bounce back in 2H22, due to children returning to school and tourism resuming.
The medium-term outlook for Smiggle is supported by PMV’s focus towards high EBIT margin channels with much lower capital requirements (i.e. shift towards wholesale and online). This has been accompanied by a reduction in the number of Smiggle stores from 347 as at 1H21 to 306 at the end of FY22. Notably, the portion of online sales for Smiggle is typically higher than other PMV brands, it is lower than that for competing brands in Europe/UK.
Expansion Opportunities for Peter Alexander
Peter Alexander reported record FY22 sales of $428.5m, (+11.4% on FY21). This was underpinned by strong growth both in stores and online and growth across all product categories. Peter Alexander has delivered 3-year sales growth of 72.9% from pre-COVID FY19 to FY22, more than doubling sales in the last five years. This growth was also supported by a growth in the number of stores and shift towards larger store formats.
Larger format store expansion opportunities have been identified as a runway for further growth. This is to better showcase the wider product offering that has been developed in recent years. Three larger format stores have already opened in Australia and a further four stores are expected to open in 1H23.
The Company is also testing the potential for offshore expansion in Peter Alexander, given the strength of the brand domestically and with offshore customers buying through the Australian website. As with Smiggle’s initial offshore expansion, this was led by a store roll-out strategy in the UK and Asia to build the Peter Alexander brand in new markets.
Balance Sheet Provides Scope for Further Capital Management
The strong net cash position has enabled the Company to announce a special dividend of 25 cents per share (in addition to a final dividend of 54 cents per share) as well as announced an on-market share buyback of up to $50m.
Accounting for both the final & special dividend payment (~$125m) and the share buyback (~$50m) post balance sate, there is still sufficient net cash (or surplus capital) available for the Company to pursue acquisitions as well as further capital management options. The latter includes potential for further special dividends, given that PMV has an attractive pool of franking credits ($289.7m as at 30 July 2022).
Premier Investments shares are currently trading on a 1-year forward P/E multiple of ~17.5x and while this is below the recent trend, we remain cautious on the prospect for a re-rating. In particular, while solid trading momentum has continued into FY23 (sales growth of 42.8% in the first twelve weeks of 1H23, up 21.7% on pre-COVID levels), group sales and earnings are likely to come under pressure in 2H23, given that the macro backdrop (weakening consumer demand/confidence, currency and inflationary pressures on wages) is likely to become more challenging.
We contend that, on balance, the potential downside risk to both earnings and valuation from these factors are likely to outweigh the investment appeal of further capital management as a result of the strong balance position.
Since the lows in June, PMV was able to make some decent progress by forming some higher highs and higher lows. We can see that it recently hit the 200 day moving average (blue line) at the start of October, congested under it, and then broke higher in the past few days. This is a bullish sign and suggests that PMV may have some more upside in the short-term.
Michael Gable is managing director of Fairmont Equities.
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