Premier Investments (ASX:PMV) recently completed changes to its business portfolio. This entailed the sale of five core apparel brands in Australia & NZ to Myer and ceasing its investment in Myer. The remaining businesses (Smiggle and Peter Alexander) are valued significantly higher than the current share price.
This ‘valuation gap’ has been in existence for some time. The key reasons for this include recent underperformance in Smiggle and market concerns about the expansion plans for Peter Alexander in the UK. Accordingly, we recently researched the Company in The Dynamic Investor to assess the prospects for the ‘valuation gap’ to close.
About Premier Investments
Premier Investments owns global retail brands Smiggle and Peter Alexander.
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).
Peter Alexander is a retailer selling sleepwear (men, women & children), homeware and beauty products.
In early 2025, the Company successfully completed the sale of five core apparel brands in Australia & NZ to Myer, therefore ceasing to own the apparel brands (comprising the brands Just Jeans, Jay Jays, Jacqui E, Portmans and Dotti) and its investment in Myer.
The Company also holds a 25.5% stake in small kitchen electrical appliance wholesaler Breville Group (ASX: BRG), as well as an investment in real property assets.
Key Fundamental Drivers
Improving Outlook for Smiggle
Smiggle has faced a challenging few years with sales for the six months to 25 January 2025 (1H25) ~20% below 1H20 levels. The drivers of sales weakness remain a key investor debate – and vary from cyclical headwinds, structural concerns (e.g. higher competition) and/or mis-execution.
Smiggle’s performance in 1H25 was mixed. Strong sales growth was reported in Australia and NZ, but declines in the international component of the portfolio. The Company is addressing these challenges by rebuilding its management team and expanding its product pipeline.
We highlight two factors that support a more positive outlook for Smiggle over the medium term:
i. Global retailers and producers moving out of the Chinese market given the new tariffs in place. With the majority of product coming out of China, the Company consider this as a potential competitive edge to lift and recover lost margins.
ii. Store expansion. Two new stores were opened in 1H25, with Smiggle planning on expanding and opening more outlet stores in the UK, which tend to have strong performance. PMV sees the opportunity to grow by a further 10+ stores in existing regions. Additionally, PMV sees the Smiggle brand evolving in wholesale partnerships and aims to enhance expansion through opening stand-alone stores in key evolving markets. These include Indonesia and the Middle East.
Growth Opportunity for Peter Alexander Underpinned by UK Expansion
Investment in the Peter Alexander retail channel is delivering significant growth within existing markets of Australia & NZ, with sales in Australia & NZ having doubled over the last five years. The next phase of growth in Australia & NZ is likely to be driven by both new stores and upgrades to larger format stores.
Additionally, given the highly-attractive margin that Peter Alexander stores generate, the recent expansion into the UK is considered highly incremental to the current earnings base. In the UK, a dedicated Peter Alexander UK website and three stores in prime London shopping centres were launched in November 2024. PMV sees opportunities for a further seven new stores as part of the initial launch plans over the next few years. With a population more than double Australia & NZ, the UK market provides a significant runway for future growth.
Having said that, a challenge for Peter Alexander in the UK market would be that the UK is seasonally and climatically different to Australia. This means that when Peter Alexander has a light-weight range in Australia & NZ, the UK range would be winter wear.
Margin Expectations
Gross Profit Margin (GPM) performance in 1H25 was impacted by promotions and foreign exchange headwinds. GPM for Premier Retail declined by -59 basis point in 1H25 to 67.8%, driven by a weaker performance from the higher-margin Smiggle business. GPM over the short-term is likely to increase on the back of: i) Smiggle & Peter Alexander being higher GPM stores (noting that the 1H25 figures included financial for the five core apparel brands) and ii) Cost reductions in Chinese factories, which may offset the above-mentioned cost pressures moving forward.
To balance the argument, there is a potential impact on GPM from higher promotional activity (likely to be evident in the upcoming FY25 results reporting season). Further, there may also be operating margin pressure due to higher operating expenses.
EBIT margin in 1H25 compressed by -483 basis points, with a steep lift in Cost of Doing Business (CODB) – +40 basis points as a % of sales – accounting for the bulk of the decline. The main negative surprise was a +16.8% lift in rent (in $ terms), which PMV attributed to new and upsized stores.
Aside from higher rental costs associated with store rollout/refurbishment program, we do not expect rental costs for the existing network to be a headwind. This is mainly because PMV generally enjoys the benefit of a strong position with landlords.
Fundamental View
We outline several factors likely to preclude a re-rating from current levels in the near term:
i. While an improvement in Smiggle’s sales is expected in 1H26, a key investor concern is that sales performance is likely to be hampered by structural issues, especially in international markets.
ii. Recent commentary from other ASX-listed companies with businesses exposed to discretionary spending have alluded to continued challenges in consumer discretionary spending.
iii. The international expansion of Peter Alexander (especially in the UK) is a key investment risk given its highly competitive nature.
iv. Continued pressure on margins (GPM and EBIT) from higher promotions and/or higher operating costs.
v. PMV shares are currently trading on a 1-year forward P/E multiple of ~19x, which is unappealing in the context of an EPS growth profile of ~6% over FY25-27 on a CAGR basis.
Charting View
PMV is still trending lower since the December peak. Short-term, however, has some upwards momentum and looks set to test a major resistance level near $22. A clear break above $22 would be a positive from a charting point of view. However, a failure to do that leave it vulnerable to slipping to levels under $20 again.
Michael Gable is managing director of Fairmont Equities.
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