Australia | Sep 21 2011
– Premier Investments result met expectations
– Guidance maintained for FY12
– Weakening retail environment sees cuts to earnings forecasts
– Two broker ratings downgraded post result
By Chris Shaw
Retail group Premier Investments ((PMV)) reported an adjusted net profit after tax of $51.5 million, a result down 20% relative to the previous corresponding period. The result contained few surprises as management had guided in earnings in July.
In assessing the result, Macquarie notes Premier's largest brand Jay Jays delivered disappointing performance in the period. As an offset, the smaller but current drivers of top line growth, Smiggle and Peter Alexander, performed strongly. Macquarie also notes an update on a strategic review shows most initiatives are currently on track or a little ahead of schedule.
Credit Suisse picked up on the fact underlying fixed cost growth per store of 4% and weak sales were unable to be offset by cost reductions, meaning operating leverage for the period was negative. Additional marking down of inventory was needed and this also impacted on earnings, but on the positive side the move leaves Premier with a clean inventory position for the first half of FY12.
With the result, management at Premier indicated that while earnings guidance for FY12 is unchanged, trading for the first six weeks of 2012 has been weaker than expected. As Deutsche notes, this reflects a further deterioration in both the macro environment and consumer confidence.
To deal with this Premier intends accelerating its cost-out program and the rolling out of additional Peter Alexander and Smiggle stores, but brokers see this as unlikely to be enough to avoid any earnings impact in the coming year at least.
Changes to earnings forecasts reflect this, with most in the market responding to the result and outlook commentary by trimming estimates through FY13. As examples, Citi has lowered its earnings per share (EPS) estimates by 1.7% in FY12 and by 3.3% in FY13, while Credit Suisse has dropped its forecasts by 6.2% and 4.6% respectively.
Consensus EPS forecasts for Premier according to the FNArena database now stand at 39.3c for FY12 and 45.9c for FY13. This implies relatively flat earnings in FY12 relative to FY11.
Changes to earnings forecasts have flowed through to changes in price targets, with the consensus target for Premier according to the database now standing at $5.75. This is down from $5.95 prior to the result.
Brokers have also responded by downgrading ratings for Premier, with both Macquarie and UBS downgrading to Neutral from Outperform ratings previously. The downgrade is a valuation call for Macquarie, as in July the broker upgraded Premier given an attractive multiple and the potential for cost cutting to offset the tough retail environment.
Since July however Premier's share price has risen by around 7% while the retail environment appears to have deteriorated even further. This suggests limited potential for outperformance, particularly given any earnings recovery in FY12 will likely be weighted to the second half of FY12.
UBS agrees, taking the view the current operating headwinds are likely to outweigh any cost cutting benefits in the shorter-term at least given the weakening retail sales environment. Longer-term there remain positives in UBS's view, especially given a net cash and investment position of around $1.85 per share offers scope for acquisitions.
Overall the FNArena database shows Premier is rated as Buy once and Hold five times. The Buy comes from Deutsche Bank and reflects both value at current levels given a forecast earnings multiple of eight times in FY13 and cash on the balance sheet providing some backstop to the share price.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
