Smiggle Surprises For Premier

This story features PREMIER INVESTMENTS LIMITED. For more info SHARE ANALYSIS: PMV

-Slower earnings growth likely in second half
-Smiggle a material earner over long term
-Selling conditions deteriorate in Feb/Mar
 

By Eva Brocklehurst

Premier Investments ((PMV)) hit a high note in its first half results, impressing brokers with the quality of earnings and the progress so far in the UK roll-out of its fun Smiggle stationery stores.

Deutsche Bank lauds the company for getting the job done in negotiating the current retail environment and managing the mix of growth and margins. The broker believes the stock warrants a premium to the discretionary retail sector, given its superior growth profile and balance sheet.

Yet Citi is not swayed by the impressive headlines in the half year results. Instead, the broker is looking at the slower retail growth that portends for 2016, as well as the margin pressure that will materialise for Premier Investments as FX benefits disappear. The broker downgrades to Sell from Neutral, with the share price considered fair value but weakness expected as growth slows.

Premier's first half earnings beat forecasts, with profit up 26% on the prior corresponding half. Like-for-like sales growth was 6.9% and all the company's brands made a positive contribution.

Several issues, such as a warmer February/March, early Easter and an election cycle, may mar the retail environment and make it harder to manage, Macquarie suggests, but management does not appear perturbed, remarking that the fourth quarter was more important than the third and the business is well set to execute in that period.

Macquarie's second half forecasts assumes no like-for-like sales growth in established brands. Still, the broker continues to believe Smiggle will be a material driver of profit over the medium to long term. Forecasts contain room for established brands to decline materially and so the first half results are considered to be supporting Macquarie's conservative expectations in that regard.

The broker believes Premier Investments can hold its premium valuation while Smiggle performs. Premier Investments has upgraded its target for store roll-outss. Revised guidance is for 100 Smiggle stores by the end of 2016, with 40-60 per annum over 2017-2019.

Meanwhile, Peter Alexander sales grew 22.6%, Online sale rose by 48% and Portmans was up 19%. Jacqui E sales rose 2.2% and Dotti by 7.4%. The company declared an interim dividend of 23c. The company decided not to pay a special dividend, as it did in the first half of FY15, stating it intended to use cash for future investment.

Bell Potter strengthens gross margin assumptions and lowers cost/revenue ratio estimates. The broker also raises the multiple in its valuation, given the effectiveness of the company’s strategic initiatives and the outperformance of Smiggle. The net effect is an increase in FY16 and FY17 forecasts of 8.0% and 10.0% respectively.

Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, retains a Buy rating and raises the target to $17.40 from $13.40. Despite competition increasing and a lower Australian dollar the broker has confidence in management's ability to drive growth.

The significant improvement in gross margin surprised Credit Suisse, which suspects the main reason for this, outside of a mix shift towards Smiggle and Peter Alexander, is a strong Christmas sales period. This contributed to a very strong sell-through at full margin.

Hence, the broker suspects this situation will partly reverse in the first half of FY1. In terms of sales growth and gross margin improvement for established brands, Credit Suisse factors in a more normal Christmas trading period, noting the company is fully hedged for purchases through FY17. The broker believes the stock is fully valued and retains an Underperform rating.

The second half is expected to be more challenging in the lead-up to the federal election and is heavily dependent on seasonal conditions. Selling conditions have not been favourable seasonally to date in the second half, and the broker adds the proviso that its forecasts are based on normal seasonal conditions through the key period May to July.

UBS believes the results are of the best quality the company has ever delivered. Sales growth was strong across all brands and flags the potential for 1500 Smiggle stores globally to open over the next decade. The broker's optimism, despite acknowledging that several retailers have flagged the negative impact of a warm start to autumn, as well as political uncertainty, is based on the Smiggle proposition.

The seemingly unique proposition to 5-12 year-olds continues to show global appeal, the broker maintains. The UK has opened 18 stores and continues to have over 10 of the top 20 global Smiggle stores In portfolio. The first stores in Malaysia and Hong Kong will open in the next few months. UBS believes upside risk is building to forecasts, increasing medium-term earnings estimates by 6-10% and long-term earnings forecast by 20-25%.

That said, given increased risks to the discretionary retail outlook, and a general skew to the first half for UK Smiggle earnings, as well as a normal 26-week period – there was one extra week in this result – the broker does not expect the growth rate to continue at the same clip. Still, UBS continues to have confidence in the company's ability to increase its gross margin in core brands through sourcing initiatives.

FNArena's database shows two Buy, two Hold and two Sell ratings for Premier Investments. The consensus target is $14.67, signalling 6.2% downside to the last share price. This target compares to $12.69 ahead of the results.
 

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