Premier Investments (ASX:PMV) has been a solid performer over the years. Do we still see upside in the share price?
Overview of Premier Investments
The Company 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. They currently account for 43% of group sales in FY18. Smiggle is a retailer selling bags & accessories, pencil cases, food & drink, stationery, toys and school supplies. Smiggle has a network of 347 stores (including concessions) in major developed countries/regions. 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 (currently 11% 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 FY18 sales contribution, these comprise Just Jeans, Jay Jays, Portmans, Dotti and Jacqui E.
Key Investment Considerations
A Clear Long-Term Strategy for Smiggle
At the FY18 results release, PMV reiterated the $450m sales target for Smiggle by FY20 ($293m in FY18) and announced an accelerated multi-channel growth strategy. The key aspects of this strategy entail shifting emphasis from traditional roll-out to online stores, additional capital-light concessions, and a wholesale offering for markets where PMV won’t have a retail presence (i.e. new Asian markets).
We consider this sales target to be achievable, given that the required sales uplift over the next two years (+53% from FY18 to FY20) is similar to the sales growth achieved over the last two years (+58%). In light of the multi-channel strategy outlined from Smiggle, there is a possibility that this sales target could be achieved ahead of plan.
There is some market caution around the Company’s strategy for Smiggle, namely that the likely expansion in group margin resulting from the multi-channel strategy for Smiggle has the potential to be mitigated by rising labour costs and online investment, both of which may carry over into FY19. However, there are a number of strategies available to PMV to mitigate this impact. These namely are: i) increased penetration in the higher-margin online channel (10% penetration in Australia/NZ; 15% in UK) and ii) Intention to continue with the closure of unprofitable core apparel stores
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Peter Alexander Growth Plan Ahead of Schedule
Having reported sales growth of 14.5% to $218.7m, PMV reiterated that the Peter Alexander business is on track to exceed $250m sales by FY20, with the growth plan progressing ahead of expectations. The online and category expansion is positioned for a strong FY19, including: plus-size and children’s wear, home fragrance and Bath & Body (i.e. The Bath & Body range was launched successfully in April 2018).
Balance Sheet in Net Cash Position
PMV has a typically strong balance sheet and cash generation, which funds the store rollout program, online investments and geographic expansion, as well as a high dividend payout ratio of ~80%.
A Technical View of Premier Investments
PMV has been trending strongly for the last 12 months. Price action for the moment though is starting to look weak. After peaking a few weeks ago, the shares were then sold down heavily on increased volume. The stock is now hitting resistance in the midpoint of that large red candle. This implies that weaker levels are to follow for PMV, possibly back towards $16.
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Michael Gable is managing director of Fairmont Equities.
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