Australia | Oct 04 2022
This story features PREMIER INVESTMENTS LIMITED. For more info SHARE ANALYSIS: PMV
Brokers remain upbeat on Premier Investments following FY22 results though remain wary of the uncertain macroeconomic backdrop.
-FY22 results for Premier Investments exceed consensus forecasts
-Brokers show caution around the macroeconomic outlook
-Results for Smiggle and Peter Alexander surprise positively
-Rental negotiations lend earnings margin support
-A positive outlook for Peter Alexander
By Mark Woodruff
FY22 results for Premier Investments ((PMV)) exceeded broker consensus expectations, while sales for the first seven weeks of FY23 were 21.5% above pre-covid levels.
Sales, earnings and profit for FY22 rose by 5%, 3% and 5%, respectively, versus the previous corresponding period.
The retailer finished the financial year with $402m in net cash, declared a 79cps final dividend, including a 25cps special dividend, and announced a $50m on-market share buyback.
While five of the six brokers in the FNArena database make material adjustments to individual 12-month target prices, the average target price remains largely unchanged at $25.60, which suggests 14.2% upside to the latest share price.
Providing an insight into this tepid response by brokers, Macquarie cites the uncertain macroeconomic backdrop and looming gross margin headwinds from adverse currency movements, along with lower scope for consumer promotions.
Despite this view, the broker remains upbeat, as indicated by its Outperform rating, highlighting 50bps of gross margin expansion for FY22 along with sales growth across all brands, apart from Just Jeans and Jay Jays.
Morgan Stanley, while positive on the currently resilient consumer and solid management execution, agrees with Macquarie on the challenging macro-outlook, and retains an Equal-weight rating.
Premier operates an array of Australian retail apparel brands which also includes Portmans, Jacqui E, Dotti and Peter Alexander. The company also owns Smiggle, which sells a range of stationery and ancillary products.
According to Morningstar, Smiggle has an affordable price point and limited direct competitors in its geographic markets, which include A&NZ and the United Kingdom.
Smiggle results were a highlight for UBS with sales benefiting from children returning to schools, while second half sales for Peter Alexander were 71% above pre-covid levels.
This broker points out consumer perception of the Peter Alexander brand has been upgraded in recent years, and a category expansion into accessories, kids and plus size has driven sales higher.
Citi raises its earnings forecasts to reflect a positive surprise from Peter Alexander sales, and its contribution to the gross margin uplift, though lowers its rating to Neutral from Buy following a 15% share price rally on the day results were released.
Margins were also supported by the company’s upper hand in rental negotiations, according to Citi. Ord Minnett agrees and expects rents to remain low, noting Premier’s occupancy cost ratio was 13% in FY22, well below the high-teens of the pre-covid period.
Expansion of Peter Alexander and Smiggle is likely to drive structural growth in FY24 and FY25, according to Credit Suisse, while the balance sheet provides scope for opportunistic acquisitions.
More detail on margins
Credit Suisse points out Premier’s gross margins have risen to 64.8% in FY22 from 61.9% in FY19, due to a relatively low promotional environment.
Now, currency movements and high promotional intensity are driving a step-down in Ord Minnett’s gross margin forecasts to 63.6% in FY25.
However, this broker expects earnings (EBIT) margins will remain well above pre-covid levels as online penetration drives a favourable mix shift, particularly around rent costs.
Despite the inflationary environment, the strong hand in rental negotiations is contributing around 400bps of earnings margin uplift on an ongoing basis, according to Citi.
Rising labour costs were well managed in the second half of FY22 as stores reopened, and UBS remains confident they can be managed well in FY23.
A positive outlook for Peter Alexander
According to Credit Suisse, the major company-specific determinants of growth over the medium term are the expanded children’s and plus-size ranges for Peter Alexander, along with the development of larger format stores.
The broker believes this space expansion could be a low-to mid-single-digit tailwind for Peter Alexander over the medium term and suggests Premier Investments has positive upside risk relative to retail peers.
Given the strength of the Peter Alexander brand domestically and strong offshore customer purchases via the online channel, Ord Minnett points out the company is currently testing the potential for offshore expansion. Stores are being rolled-out in the UK and Asia in a similar manner to the initial Smiggle expansion.
There are three Buy (or equivalent) broker ratings in the FNArena database and three Hold ratings.
Shaw and Partners, which is not monitored daily by FNArena like the six brokers mentioned above, equally holds a positive view on Premier Investments. This view is supported by historical data of global recessions over the past four decades suggesting Australian clothing sales hold up in times of economic uncertainty.
Shaw's rating is Buy with a price target of $27.50, up from $27.10 post the recent FY22 release.
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