Super Retail Provides Unnerving Outlook

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This story features SUPER RETAIL GROUP LIMITED.
For more info SHARE ANALYSIS: SUL
The company is included in ASX200, ASX300 and ALL-ORDS

Ahead of the key Christmas trading period, Super Retail has warned sales are sluggish, underscoring the importance of getting the right balance in sales and margin.

-Automotive division may be more defensive but not immune to slowdown
-Departure of long-standing CEO adds another layer of risk
-Commentary signals impending margin pressure
 

By Eva Brocklehurst

Slowing retail sales, reflecting a subdued consumer, are affecting Super Retail ((SUL)) across all three major divisions and brokers are alert to the signs heading into the important Christmas trading period.

The company reported automotive like-for-like growth was 3.1%, Rebel 2.4% and BCF 2.4% in the September quarter. Macpac was the exception to the slowdown, posting comparable growth of 8.4% that implies an acceleration over the last 10 weeks.

Bell Potter suggests the slowdown has become amplified in recent weeks, and the fact the company stated it was important to get the business balance right is an unwelcome sign ahead of the major Christmas trading period.

Automotive is the most important division, accounting for around 49% of FY18 earnings (EBIT). Automotive has more defensive attributes versus Rebel and BCF (sports and leisure) but is also not immune to a cyclical slowdown.

While there are a number of positives, such as a leading market position and a strengthening omni channel platform, as a mature domestic retailer, Bell Potter believes the company's market position is now outweighed by the macro and competitive headwinds.

Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, reduces forecasts and increases the risk parameters used in valuation, with the net effect being a reduction to FY19 and FY20 forecasts of -9.7% and -11.1% respectively. The broker reduces the target to $7.35 and downgrades to Sell from Hold.

UBS believes the company is investing for the long term but considers the valuation fair, although the risk to near-term earnings is increased if current trends continue. To become more positive the broker would need to assume FY21 targets are met and witness an improving consumer backdrop.

On the other hand, Ord Minnett believes the reaction in the share price to the update was too severe and upgrades to Accumulate from Hold. The broker believes Super Retail is anchored by a strong automotive business that continues to deliver while, in outdoor, the Macpac acquisition is performing strongly.

CEO Departing

The subdued trading update was also accompanied by news the current CEO, Peter Birtles, would step down in the first half of 2019. This change to CEO comes a year after the appointment of a new chairman.

Given the upcoming departure of the CEO Credit Suisse believes it worth considering the implications of any change to strategy. The company's strategy depends on store openings, the recent conversion of Amart to Rebel stores and the adopting of higher cost positions in sports retail.

Moreover, the performance in BCF and Rays has not been inspiring, with the latter closing down and BCF delivering sub-optimal profit, while Macpac has been acquired to provide further growth in leisure.

Credit Suisse also notes Super Retail operates an integrated multi-brand distribution system which appears to constrain divestment of brands. Macquarie and Citi agree the departure of the CEO after 12 years adds an extra layer of uncertainty to the stock.

Margin Pressure

UBS envisages the risks lie with softer top-line trends and, along with Morgan Stanley, suspects margin pressure via discounting. Credit Suisse agrees the slowdown in like-for-like sales growth is signalling additional margin pressure, while upgrading to Neutral from Underperform on valuation grounds in the wake of the drop in the share price.

Macquarie downgrades to Neutral from Outperform, believing the broader sell-off in the retail sector indicates retail trade is unwinding at an accelerating pace. This implies investor sentiment will err on the cautious side and, at this stage, the broker finds it difficult to identify a catalyst sufficient to change this scenario.

Morgans asserts the commentary regarding a more cautious consumer and balancing the top line and margins over Christmas has just spooked the market. The statement actually reflects, the broker suspects, a focus on growth in gross premium, perhaps at the expense of the top line.

Morgans remains comfortable with this focus and points out that around 50% of earnings come from defensive business, calculated to be worth around 10x operating earnings (EBITDA). The remainder, outdoor & sports, is valued at around 5.3x FY19 for combined earnings (EBIT).

Yet the broker acknowledges that Christmas trading needs to be in line with expectations and the stock is unlikely to outperform in the short term until this is established.

FNArena's database now shows three Buy ratings and five Hold. The consensus target is $9.51, suggesting 22.7% upside to the last share price. The dividend yield on FY19 and FY20 forecasts is 6.8% and 7.0% respectively. Targets range from $8.39 (Credit Suisse) to $10.90 (Citi).

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