Super Retail Cranks Up Restructuring

This story features SUPER RETAIL GROUP LIMITED. For more info SHARE ANALYSIS: SUL

-All divisions reporting sales growth
-Ray's Outdoors to become RAYS
-Infinite Retail also restructuring
 

By Eva Brocklehurst

Super Retail ((SUL)) continues to weed out underperforming businesses, with its restructure plans accelerating over the next 12 months. Brokers approve of the plans and welcomed the trading update, which suggests all divisions are lifting sales.

Ray's Outdoors will be re-branded to RAYS, largely representing the format which has been trialled over the past 12 months. From the existing 55 Ray's stories, 17 will be converted to the new format by October 2016. Of the remainder, 11 will be re-branded as BCF, three as Amart and one as Supercheap. The rest will be either re-branded or closed. All this is expected to be completed by February 2017.

Management expects $110m of the $135m of Ray's revenue can be retained in its leisure division. The earnings benefit from closing the loss-making stores is forecast to be $8m, with 75% realised in FY17. No assumptions on incremental margin uplift within Ray's or BCF are made but management is targeting RAYS sales revenue to reach similar turnover to BCF. This implies a turnover increase of around 30%.

Morgans takes a conservative position on the outlook, given the recent trials of RAYS have only been operating for less than a year. The broker notes costs associated with the restructure are significant and will make for a messy FY16 report but supports the strategy, as well as the harder line the company is taking with the Ray's Outdoors business, which is expected to make a substantial loss in FY16. Deutsche Bank also notes the initiatives, while welcome, are far from certain of success and the company is deploying a lot of capital to support growth.

Macquarie had considered a complete closure of the Ray's chain was a possibility. The leakage of just $25m from the sales generated from Ray's is the key risk the broker observes in the company's financial assumptions.

Super Retail will also restructure Infinite Retail, as it has been a drag on its sports division. Management is seeking to renegotiate some unprofitable contracts, largely with sporting bodies and clubs, and align the Rebel and Infinite IT platforms. Infinite Retail is expected to post a $5m loss in FY16, before breaking even in FY17 and contributing $25m in revenue. All up, Macquarie believes the initiatives will mean FY17 shapes up as a better year for growth at Super Retail and upgrades to Outperform.

Trading at the start of 2016 has been strong with like-for-like sales up across all divisions. Automotive accelerated to 5.8% from 4.0% in the last 10 weeks of the third quarter, while sports strengthened to 6.4% from 5.5%. Leisure sales are up 4.5% year to date. Margins within the automotive and sports divisions are higher, while leisure is affected by lower pricing, higher costs and inventory clearing.

Profit upgrades associated with the initiatives are better than Morgan Stanley expected. The broker lifts earnings forecasts to account for reduced losses from Ray's, while noting the sports and automotive segments have market-leading positions and are well placed for growth. The broker finds the stock's valuation even more attractive now, given the earnings outlook has improved.

UBS believes the stock is screening cheaply on risk/reward basis and expects investor sentiment will improve as the benefits of the restructuring become evident. Over the medium term the broker considers the growth story is intact, with continued momentum in automotive and sport, margin recovery in leisure and a stronger cash flow. UBS suspects the strong balance sheet will provide scope for capital management in FY18.

There are four Buy ratings, three Hold and one Sell rating on FNArena's database. The consensus target is $9.51, suggesting 0.6% upside to the last share price and compares with $9.27 ahead of the update.
 

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