Undeterred Premier Plans Ongoing Expansion

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Following interim results for Premier Investments, brokers weigh future growth prospects against falling consumer demand.

-First half results for Premier Investments exceed consensus forecasts
-Brokers like the retailer's growth prospects, but are wary of the macro backdrop
-Premier’s six apparel brands are underperforming the market
 

By Mark Woodruff

Following first half results, Premier Investments ((PMV)) remains Morgan Stanley’s preferred pick under the broker's coverage of the small cap Retail sector in Australia, while Shaw and Partners feels the company is best placed among peers to perform in the current retail environment.

Premier operates an array of Australian retail apparel brands which includes Just Jeans, Jay Jays, Portmans, Jacquie E, Dotti and Peter Alexander.

The company also owns Smiggle, which sells a range of stationery and ancillary products, and owns equity stakes in both Breville Group ((BRG)) and Myer ((MYR)) of around 26%.

The result beat consensus forecasts for sales and earnings by 5% and 6%, respectively, with the company benefiting from an extraordinarily buoyant Australian fashion retailing market, comments Ord Minnett, on top of a rebound in demand for school essentials.

As Jarden’s forecasts were ahead of consensus estimates, this broker cut its rating to Neutral from Overweight on a full valuation and growing macroeconomic headwinds.

Before turning more positive, Jarden would like to see traction for the proposed international expansion of Peter Alexander, accelerating growth for Smiggle, plus a sustained lift in return on invested capital (ROIC).

UBS attributes a strong labour market and elevated household savings accumulated during covid for the 18% year-on-year rise in group sales and 12% lift for operating profits.

Smiggle, Portmans, Peter Alexander and Just Jeans were at the forefront of surging sales in the half with increases of 30.3%, 19.9%, 15.1% and 14.4%, respectively.

Just Jeans, Portmans and Dotti all delivered record interim results, and Jacqui E delivered its highest first half sales result in over a decade, while Jay Jays delivered its second-best result.

Shaw and Partners assesses a solid start to the second half after management flagged sales for the first six weeks rose by 7.7% year-on-year.

The board not only declared a 54cps ordinary dividend, but also a 16cps special dividend, both of which were fully franked. Lighten-rated Ord Minnett forecasts a total FY23 dividend of $1.25cps. 

Ord Minnett whitelabels Morningstar research and the latter's $19 target price is included in, and stands in stark contrast to, the average target for Premier of six brokers in the FNArena database of $26.57, which barely changed following the interim results. The other five covering brokers have three Buy (or equivalent) recommendations and two Holds.

The market has a more positive outlook on consumer demand relative to Ord Minnett/Morningstar. Second half sales for Premier will decline significantly, if the latter's forecast proves correct, in line with its subdued expectations for the broader Australian fashion and department store retailing sub sectors.

Ord Minnett/Morningstar also point out fashion retailing sales grew by 30% for the six-month period to January 2023, yet Premier’s six apparel brands only increased sales by 15% in the first half, which also ended in January.

On the flipside, Overweight-rated Morgan Stanley prefers to highlight a return to growth prospects for the retailer, courtesy of a resumption of store roll-out plans for Smiggle and Peter Alexander, as well as the upcoming offshore expansion for Peter Alexander.

While Morgan Stanley shares Ord Minnett’s concerns regarding increasing cost of living pressures for the consumer, it's felt Premier is best placed among ASX-listed retail peers to manage any demand slowdown.

The opportunity for Peter Alexander and Smiggle

Peter Alexander has opportunities to open around 20-30 new and/or larger stores to better present its extended range across accessories, kids and plus size, notes UBS.

Four new larger formats were added in the first half as planned, observes Macquarie, and these are all trading ahead of management’s expectations.

Offshore plans include a partnership agreement which is being finalised with a global cross border e-commerce provider with access to 35 countries, which is set to launch in the 1H of FY24.

Meanwhile, Smiggle will open over 30 additional stores across its six existing markets in the near term, with further wholesale expansion and the potential evolution of existing wholesale models in the Middle East, Thailand and Indonesia, explains UBS.

Buy-rated Shaw and Partners feels the market is continuing to under-rate Premier’s future earnings capability and flexibility. Ongoing share price strength is expected from store rollouts and cashflows, and the potential for both M&A activity and capital returns.

The $26.92 average target price for Premier Investments in the FNArena database suggests less than -4% upside to the current share price. As specified earlier, that $19 target by Ord Minnett weighs on the average.

Outside daily coverage, the average target price of Jarden and Neutral-rated Goldman Sachs is $23.45.

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