A Surprise In Premier’s Pyjamas

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

-Underperforming brands turn around
-Upside from efficiencies offsets FX
-Brokers welcome return to special divs
 

By Eva Brocklehurst

Premier Investments ((PMV)) has cut across the fashion retailer grain, delivering a strong first half result. The launch of pyjama retailer Smiggle UK was the key element which surprised to the upside but the company is also showing signs of a turnaround across its core suite of brands. An interim dividend of 21c was declared along with a 9c special dividend. No formal guidance was issued but the company indicated trading in the second half to date has been robust.

UBS found like-for-like sales growth a little soft, while earnings quality was not as high as in recent periods. Nevertheless, the gross margin expanded as a result of the move in the sales mix to Smiggle and Peter Alexander, the two bright stars in the company's universe. The two brands which suffered sales falls in the first half – Dotti and Portmans – have now returned to growth post the balance date.

UBS forecasts the Smiggle store network to lift to 450 by FY25, from 177 stores currently. A total of 19 stores have commenced trading in the UK with 14 more stores due to open in that market in 2015. Should western Europe and other parts of Asia be rolled into the brand's coverage, the broker envisages total stores could rise to 1,000. UBS suspects upside risk to current forecasts remains in train.

Morgan Stanley also notes both the two underperforming brands in the first half have had a strong start to the autumn campaign. Smiggle UK is expected to break even in FY15 and its expansion will likely be the key driver of the group over the next five years, in the broker's opinion. Peter Alexander's growth plan is also on track, with eight new stores opened in the half. However, Morgan Stanley calculates that these stores have a significantly lower contribution compared with the average. Morgan Stanley retains an Underweight rating.

It was a stellar result, in Credit Suisse's view, driven by Peter Alexander and Smiggle UK as well as improved performances from Jay Jays, Just Jeans and Jacqui E. The broker expects the core business will outperform retail peers, given management's track record of successful turnarounds. A longer hedging profile, tight cost control and efficiencies from the national distribution centre provide further upside and the broker expects this will offset FX headwinds. Credit Suisse notes, with $205m in franking credits, further special dividends appear likely in the absence of acquisitions. The broker's rating is downgraded to Neutral from Outperform.

Macquarie also has a Neutral rating, observing Smiggle and Peter Alexander present exciting growth opportunities but, with the remaining brands largely mature, growth prospects are captured in the group's valuation.

Premier, like other apparel retailers, will cycle a weak fourth quarter from 2014, which was affected by softer consumer sentiment after the May budget and a warm start to winter. The broker's forecasts assume second half underlying retail earnings will be up 20% as a result. The long-dated currency hedge book will also afford time to adjust sourcing and pricing in response to the recent fall in the Australian dollar until well into FY16. Macquarie is encouraged by the return to paying special dividends but does not read this as a change in approach towards acquisitions or investment opportunities.

Management is doing an outstanding job in negotiating a tricky retail environment and obtaining the right mix of growth and margin, in Deutsche Bank's view. The broker envisages potential for positive earnings surprise, namely from the initiatives in turning around brand, store refurbishments, supply chain investment and offshore expansion. The stock price/earnings ratio, ex cash and the company's Breville Group ((BRG)) investment, is in line with the discretionary retail sector, which the broker considers is a fair call.

FNArena's database contains five Hold ratings and one Sell. The consensus target is $11.20, suggesting 12.4% downside to the last share price, and compares with $10.20 ahead of the results.
 

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