Premier Investments: More Details Required

This story features PREMIER INVESTMENTS LIMITED, and other companies. For more info SHARE ANALYSIS: PMV

Premier Investments’ pre-announced FY24 sales numbers are below consensus, but brokers await further detail at the full result, along with an update on the company’s strategic review.

-Premier Investments’ FY24 sales fall short of expectations
-No detail, leading to plenty of speculation
-Not too bad a result considering
-De-merger and merger plans key to FY25

By Greg Peel

Premier Investments ((PMV)) is for the most part a discretionary apparel retailer, owning familiar brands Just Jeans, Jay Jays, Portmans, Dotti and Jacqui E, some of which have been around since time immemorial.

Premier also owns Peter Alexander, which sells pyjamas and related wear, and Smiggle, which sells stationary and other accessories (such as backpacks) to school kids. While brands such as Just Jeans will sell to international customers online, Peter Alexander and Smiggle have offshore store exposure.

Despite their more specific categories, Peter Alexander and Smiggle are considered Premier Investments’ “core brands”, representing 52% of sales at higher margins than the “non-core” stable of other brands, which are gathered under the label “Apparel Brands”.

Premier Investments also owns 28.06% of Breville Group ((BRG)), while Premier’s chairman Solomon Lew, through his private company, has built a substantial stake in Myer ((MYR)), while also being Premier Investments’ largest shareholder.

It is not thus overly surprising there are plans afoot to de-merge the more vibrant Peter Alexander and Smiggle Brands, while Myer will take over the more staid Apparel Brands stable.

But meanwhile, Premier Investments has provided initial FY24 sales guidance in a trading update, ahead of its full FY24 result due on September 25. For brokers, the update has raised more questions than answers.

The trading update was not expected, but as UBS notes, it follows an article in The Australian regarding the performance of the Apparel Brands within Premier Retail.

Below Consensus

Premier Investments’ FY24 group sales of $1.6bn fell around -2% short of broker expectations. Earnings also fell short, on margins also seen as below consensus (albeit beating Macquarie’s forecast).

Sales were down -2.6% year on year, Macquarie notes. Given first half sales were down -2.8%, this implies second half sales fell -2.4%.

Note that Premier’s fiscal year ends in July.

Brokers do not see this as a disappointing performance nonetheless. The external environment for Premier Retail has been challenged, with the consumer in Australia and New Zealand facing cost of living pressures. Those consumers have been trading down across categories, UBS notes, including for apparel.

Macquarie’s High Frequency Consumer Data indicate shopping spend performed well in August, with clothing volume and spending largely in line with the same month a year ago. Overall discretionary spend shrunk to 53% of the consumer’s wallet in FY25 year to date from 54% in the prior year, with slightly higher essential spend.

Awaiting the Detail

Management did not provide any brand breakdown in the update, leading brokers to merely speculate on what led to the sales and margin miss.

The more optimistic scenario, suggests Morgan Stanley, is the miss was driven by lower-rated Apparel Brands while the higher-rated Smiggle and Peter Alexander beat.

Bell Potter estimates a wide performance gap between core and non-core brands driving positive comparables at Smiggle and Peter Alexander in the second half.

Citi offers it’s not clear whether the margin miss was at the gross profit level, cost of doing business level or due to sales mix. Citi thinks it is likely heavier discounting going into June led to gross profit margin missing, based on industry feedback.

Other reasons could include less efficient rostering and some unfavourable rental outcomes, though the broker suggests this is less likely. Peter Alexander and Smiggle under-performing apparel brands could offer another explanation, Citi posits, but this would be at odds with the assumptions of other brokers.

If heavier discounting was the reason for the miss, then a follow-up question for Citi would be whether inventory has been refreshed going into FY25. If costs or sales mix were explanations, then there could be longer-term earnings margin implications.

Citi would like to obtain further clarification from management, as would everyone else.

The decline in sales in FY24 is modest, UBS suggests, reflecting the breadth of brands, including higher growth brands Peter Alexander and Smiggle. In recent years Premier Retail has been able to reset its operating cost base, this broker notes, notably occupancy costs, as well as manage labour well despite rising wages, with this expected to have continued in FY24, as earnings margins have fallen only to 20.4% from 21.7% a year ago.

A slight fly in the ointment is the announcement Smiggle’s managing director will leave immediately following claims he had engaged in “serious misconduct”. He is due to start as CEO of Lovisa Holdings ((LOV)) next June.

Strategic Review

While brokers look forward to more detail on sales at the upcoming result release, perhaps more important is an update on the company’s strategic review, which relates to the aforementioned consideration of de-merging Peter Alexander and Smiggle and selling Apparel Brands to Myer.

No comments were made at the update.

Bell Potter bases its Premier Investments’ valuation on a sum-of-the-parts model, with an unchanged 13x PE multiple for core brands, a lower 4.5x multiple for Apparel Brands, down from 5x, and a current market valuation for Myer and Breville Group. With the performance gap between core and non-core brands expanding, the broker lowers its margin assumptions for Apparel Brands within the valuation while rebasing earnings expectations.

This leads to a target price increase to $37.00 from $35.00, with upside from the potential de-merger of Premier’s two key brands, Smiggle and Peter Alexander, which are highly profitable and global roll-out worthy, as well as the potential Apparel Brands/Myer merger.

Bell Potter sees catalysts related to first half FY25 trading trends at the FY24 result and de-merger updates, and thereby views Premier’s PE multiple of 16x on FY26 forecasts as attractive, hence a Buy rating.

Premier Investments is Morgan Stanley’s key pick in Retail, where it continues to see de-merger catalysts, earnings upside from growth levers and cyclical tailwinds plus an attractive risk/reward balance. Morgan Stanley has an Overweight rating and a $33.90 target.

UBS retains Neutral, noting as while Premier Retail’s sales have fallen in FY24 year on year, growth is forecast in future periods led by Peter Alexander and Smiggle, while costs have been well managed in a challenged environment.

UBS agrees these factors make the risk/reward balanced following a period of share price outperformance. UBS has a $33.00 target.

Macquarie has a target of $33.50, and leaves its Neutral rating unchanged as it awaits further detail at the FY24 result.

The key focus near term should be the FY24 result, Jarden suggests, where the broker would hope to get more disclosure on the potential apparel sale to Myer and management updates.

That said, an improving medium-term return on invested capital, catalysts in potential de-mergers and a relatively undemanding multiple and strong capital position leave Jarden Neutral-rated with a positive bias, albeit a low-end target price of $29.80.

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