Premier Investments Flags Large Smiggle Expansion

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

-Mature brands weigh on growth
-Advantage over peers with AUD decline
-Offshore sourcing flexibility a key positive
 

By Eva Brocklehurst

Premier Investments ((PMV)) has impressed with a solid FY15 result, defying many of the challenges that face fashion retailing. Consistent with prior years the company provided no specific earnings guidance but did flag the expansion of the Smiggle brand into Malaysia and Hong Kong.

The company is getting the growth and margin mix right, in Deutsche Bank's view, and the premium to the discretionary retail sector is warranted. Like-for-like growth was positive across all brands in the portfolio, while the UK expansion was progressing well.

The company has cited better sourcing and lower mark-downs underpinning its margins, while the higher margin Smiggle and Peter Alexander brands are also showing the strongest growth. Sales overall were up 6.4% year on year and the overall retail earnings margin was 11.2%.

UBS describes stationary supplier Smiggle as a "category killer", with limited true competition. There are now 188 stores and the company intends to open a further 16 in the UK prior to Christmas. The roll-out potential through Asia and western Europe is substantial. Premier Investments has set its sights on 50 Smiggle stores in Malaysia and Hong Kong by 2021.

UBS increases FY25 store count forecasts for Smiggle to 750. The broker estimates that Smiggle could generate FY25 earnings of $160m and a further 50% upside to total retail earnings if the brand expands to 1500 stores over the same period.

Citi finds the signs encouraging too and upgrades to Neutral from Sell. Smiggle accounted for almost half the sales growth in FY15. As the stock has de-rated over recent months, because lofty expectations for growth have been reined in, Citi believes a Neutral rating is now appropriate. While the growth prospects for Smiggle, and to a lesser extent Peter Alexander, are strong the other brands are considered mature and a weight on earnings growth.

The broker envisages fair value price/earnings for FY16 at 18.5 times. On FY16 estimates the PE is 17.9, adjusted for cash and the company's Breville Group ((BRG)) investment. Citi suspects better offshore sourcing is providing an uplift which is more than offsetting the falling Australian dollar hedge rate.

FY16 gross margins are expected to rise 30 basis points. Earnings margins are expected to stabilise around 11-12%. The broker makes modest downgrades to earnings estimates to reflect weaker input from the Breville stake and lower net interest revenue.

The premium valuation multiples, and the fact that 72% of sales come from mature brands, limits the opportunity to outperform, in Morgan Stanley's view as well. Hence, an Equal-weight rating. Core brands are highly exposed to the retail cycle and face increased competition from international entrants. This poses a long-term risk, Morgan Stanley suspects.

The broker forecasts 28% sales growth for Smiggle over FY15-18, driven by store growth in the UK and the entry into Hong Kong and Malaysia. There is also potential for another 10-15 Peter Alexander stores in Australia and New Zealand, which should provide growth for the next 2-3 years.

Nevertheless, by Morgan Stanley's estimates, new store contributions are substantially less than the existing portfolio average and implied like-for-like sales were actually in decline in FY15.

The broker accepts Premier Investments has a significant advantage over its peers when dealing with the sharp decline in the Australian dollar, because it can hedge two years forward. This should support gross margins over the next year and allow the business to offer competitive pricing to drive sales growth.

Goldman Sachs, not one of the eight brokers monitored daily in the FNArena database, finds no major change to expectations emanating from the results. Sales growth and store roll-out for Smiggle provide a small boost to longer term forecasts and are an attractive proposition, but the broker is cautious about the mature business and the ability to grow sales. A Neutral rating is maintained.

The database contains one Buy (UBS) and five Hold ratings. The consensus target is $12.47, suggesting 2.0% upside to the last share price. Targets range from $11.40 (Deutsche Bank) to $14.05 (UBS).
 

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