Brokers Cool On Premier Investments

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

-Greatest potential with Smiggle
-Softer growth in FY15 likely
-No currency support envisaged
-Stock overvalued for many
 

By Eva Brocklehurst

After winter panned out miserably for retailers, Premier Investments ((PMV)) provided some hope for investors. The company achieved like-for-like sales growth of 4.7% in FY14. Maintaining momentum may be difficult, and the stock is viewed by some as fully priced, but brokers were impressed with the company's ability to battle soft consumer sentiment, a warm winter and inroads from international competition. All the Just Group brands showed like-for-like growth in the second half, the first time this has occurred since Premier Investments acquired the business in 2008.

Premier is benefiting from international expansion, and several brokers believe pyjama retailer Smiggle UK has the greatest potential to materially lift earnings. The roll-out of UK stores is well under way, with eight now trading and 18 expected by Christmas. Three of the ten highest turnover Smiggle stores are now in the UK. WilsonHTM notes profitability for the UK has been brought forward to FY15, although a significant earnings contribution is not expected until around FY17. The broker expects the turnaround of core apparel brands to continue too, but warns that delivering consistent like-for-like sales growth to the magnitude seen in FY14 will be hard going.

Other brokers agree with this outlook. UBS expects FY15 sales growth to weaken to 2.1%. Citi forecasts a reduction to 1.8%, acknowledging the solid FY14 result and that good sales trends for all brands are a rarity. The broker suspects sales will slow as fashion trends are less appealing this year. Also, there will be no benefit in FY15 from NZ dollar translation. To Citi, the proof of renewed momentum during FY15 will come with the successful roll out of the Smiggle stores, with some 17-22 expected to open in the UK. Smiggle is estimated to represent 13% of FY15 sales and 23% of FY15 earnings. That said, the broker downgrades to Sell from Neutral, believing the stock has overshot on value.

Gross margins will come under pressure in FY15, BA-Merrill Lynch suspects. Premier Investment's Australian dollar hedged rates will fall and the consumer environment will need to stay buoyant to maintain margins. The broker estimates a 10 basis point movement in gross margins will move earnings by 1%. There are several strategies the company has outlined to mitigate the impact of the lower Australian dollar, such as sourcing from different geographies and price increases. In terms of the latter, Merrills believes it will be difficult to achieve price rises throughout FY15. The current share price ignores the downside risks to earnings in FY15 and the volatile sales environment, in the broker's opinion, and an Underperform rating is retained based on valuation.

The company is unlikely to consider adding more apparel brands, despite its net cash position, but UBS believes it could consider a broadening of the consumer or fashion categories. The company recently increased its stake in Breville Group (BRG)) to 27.3%. UBS also notes the strong share price performance but believes dividends will be limited, downgrading to Neutral from Buy.

Moelis does not find the investment fundamentals demanding in the context of the company's strategic benefits and operational leverage. The broker sticks with a Buy rating. Credit Suisse also expects the company's brands to outperform retail peers at Christmas. Premier Investments is one of the highest quality retailers in Australia in the broker's view and there are growth opportunities geographically, and from a channel perspective. Macquarie retains a Neutral rating. While the result was better than feared and the growth attractions of Smiggle and Peter Alexander are obvious, the broker is more cautious about momentum in the core apparel brands. Jay Jays and Just Jeans still contribute over 40% of group sales. Jay Jays is slowly turning around and Macquarie acknowledges a return to growth in Just Jeans.

On FNArena's database there is just one Buy rating now, with two Hold and two Sell ratings. The consensus target is $10.36, signalling 0.3% downside to the last share price, and compares with $8.95 ahead of the results. Targets range from $9.30 (Merrills) to $11.80 (Credit Suisse).
 

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