We recently researched Premier Investments (PMV) after the Company announced its results for the six months to 28 January 2023 (1H23). It was a solid result and the Company provided further detail on growth and expansion projects for its key Smiggle and Peter Alexander brands. However, the shares have weakened since the results announcement and have struggled to gain any real traction this year. Accordingly, we consider whether the recent weakness presents an entry opportunity, or has the market started to factor in future growth opportunities?

Overview of Premier Investments

PMV 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 ~50% of group sales, which has increased from ~45% pre-COVID.

• Smiggle is a retailer selling bags & accessories, pencil cases, food & drink, stationery, toys and school supplies. Smiggle has a network of 305 stores (including concessions) in major developed countries/regions, including Australia & NZ, UK & Ireland and Asia (Singapore, Hong Kong & Malaysia). A key aspect of the Company’s strategy with regards to the Smiggle brand is to expand into Europe and increase both the portion of online 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 sales contribution from the most recent results, these comprise Just Jeans, Jay Jays, Portmans, Dotti and Jacqui E.

Key Fundamental Drivers

Margin Performance

Gross Profit Margin (GPM) declined by 223 basis points to 63.7%. This was a negative surprise given sales growth in Smiggle (the highest GPM brand), as strong result for Peter Alexander and the fact that PMV has delivered significant GPM expansion in recent years, where FY22 performance was ahead of expectations.

A key risk to GPM is higher promotional activity. To this end, inventory remains well managed relative to pre-COVID levels with 2-3 weeks higher build compared to pre-COVID levels expected to roll-off in medium term. However, promotional intensity is returning across many categories and may intensify as consumers seek out value and as local retailers are showing signs of becoming overstocked.

Smiggle Store Expansion Resumes

Following on from the strong performance of Smiggle’s international wholesale markets in 1H23, with continued strong demand from both existing and new partners, PMV announced plans at the 1H23 results release to add 30-45 Smiggle stores across existing regions. In context, the number of stores has declined from 347 as at 1H21 to 305 at the end of January 2023, given the shift to the wholesale and online channels, which are higher margin and have significantly lower capital requirements than stores.

Importantly, the growing wholesale mix, whilst higher EBIT margin, is not necessarily accretive to GPM. However, the re-commencement of the store rollout program (which is likely to be rapid given that PMV is able to leverage the existing team and infrastructure) represents a tailwind to GPM.

Growth Plans Outlined for Peter Alexander

At the interim results release, PMV provided further detail on the growth strategy for Peter Alexander, which comprises two components:

i. The Company has identified opportunities for 20-30 new and/or larger format stores in the domestic market, which represents at least 15% of the existing store base. This store rollout is expected to occur organically over the next three years subject to negotiations with landlords.

ii. The Company has been 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. PMV has committed to an international expansion of the brand, although details are scarce at this stage as the Company is aiming to finalise a deal with a global e-commerce platform to facilitate transactions (with PMV likely to retain control of the Peter Alexander brand). PMV are aiming to launch in 1H24 across 35 countries. Entry into international markets via the online route is considered a lower-risk strategy than a store presence, which in turn provides scope for the Peter Alexander brand to be expanded via stores and/or a wholesale strategy.

We consider that most of the growth strategy for Peter Alexander is likely to be concentrated around the 20-30 domestic opportunities. The reason for this is that the international online expansion will, at least initially, provide limited sales growth given that international markets currently comprise <5% of web traffic for peteralexander.com.au. This implies that brand reach for Peter Alexander in international markets has thus far been limited and that the potential for customer conversion is small given limited website visitations.

Balance Sheet Capacity Continues to Strengthen

PMV has historically held a net cash or low net debt position. As at 28 January 2023, the Company held a net cash position. The balance sheet is expected to remain in a net cash position, given ongoing working capital management and low CAPEX requirements.

In addition to the net cash position, PMV holds a 25.6% interest in ASX-listed company Breville Group (ASX: BRG), as well as a 22.9% interest in ASX-listed company Myer Holdings (ASX: MYR), which at the time of writing were worth ~$748m and ~$159m, respectively.

The balance sheet retains sufficient 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

Fundamental View

PMV shares are currently trading on a 1-year forward P/E multiple of ~17x, which is below the midpoint of the range over the last two years (~14-24x). With the shares having gained ~10% since the release of 1H23 results on 27 March, we consider that a further material re-rating from current levels is contingent on signs of traction (i.e. accretion in both margin and Return on Invested Capital) with the planned international expansion of Peter Alexander and store rollout plans for Smiggle, as well as further capital management.

Accordingly, we consider lower levels to be a more attractive entry opportunity, especially as a lower P/E multiple relative to an EPS growth profile of -2% over FY22-25 on a CAGR basis would make the risk/reward profile more balanced.

Charting View

PMV had been trending higher since June. However, we can see that since early March, it has put in a lower high and lower low. It therefore looks as though the uptrend is over for now and PMV is starting to get into a downtrend. If it can hold onto the March low, then that would be a positive. However, it appears as though the risk for now is that PMV continues to drift back. Major support is near $24.

 

Michael Gable is managing director of Fairmont Equities.

 

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