A Premier Result, With De-Mergers Next

This story features PREMIER INVESTMENTS LIMITED, and other companies. For more info SHARE ANALYSIS: PMV

Premier Investments' first half earnings surprised brokers amidst a cost of living crisis. Management announced plans to separate the two growth drivers.

-Premier investments H1 beats on earnings
-Cost control applauded
-Growth plans for Smiggle and Peter Alexander
-Planned de-mergers could unlock value

By Greg Peel

Premier Investments ((PMV)) operates apparel chains Just Jeans, Jay Jays Portmans, Jacqui E, Dotti and Peter Alexander, along with Smiggle, which sells stationary and other ancillaries mostly aimed at kids. The company also has a 26% stake in Breville Group ((BRG)) and a 28% stake in Myer Holdings ((MYR)).

The company reported $209.8m in first half retail earnings yesterday, ahead of $200m guidance provided at its AGM, also beating consensus forecasts.

The earnings beat came despite a fall in group sales of -3.4% — greater than expected – with Portmans the worst performer (-16% year on year) and Smiggle equally disappointing (-4%). Peter Alexander surprised to the upside (+7%).

Earnings exceeded expectations due to gross margins holding up better than expected. This was achieved by "impressive" management of cost of goods sold and the cost of doing business as consumers face cost of living pressures. Management kept inventory tight and rent and employee expenses well contained despite lower sales.

Demergers

While Premier’s legacy apparel brands have tended to just chug along, the stars of the retail stable in recent times have been Peter Alexander, which specialises in sleepwear, and Smiggle.

Management reiterated its growth plans for retail, including a new loyalty program by this Christmas, 20 new and larger format Peter Alexander stores in Australia/New Zealand, two new Peter Alexander stores in the UK, and a dedicated UK website, 30 new Smiggle stores in existing markets (A&NZ and UK), and a wholesale partner in Indonesia to open 100-plus stores.

More generally, Smiggle is targeted for future offshore growth.

But Premier wants to get rid of Smiggle, and Peter Alexander. More specifically, management is working towards a de-merger of Smiggle into a separate listed entity by January 2025 and exploring the prospect of doing the same with Peter Alaxander sometime in 2025.

The de-mergers have been met with varying broker views.

If the de-mergers were to proceed, says Morgan Stanley, “we should see a meaningful valuation unlock”.

Jarden questions whether the company wouldn’t be better off going the way and de-merging Apparel into another entity, thus minimising dis-synergies. Jarden nonetheless expects either strategy would result in a re-rate.

Citi says “We will look for further detail as to why Premier is looking to demerge these growth businesses separately”.

The Outlook

Last year brokers were warning against investment in the consumer discretionary sector given the cost of living crisis brought about by inflation and its subsequent impacts, being much higher mortgage costs and increasingly higher rents. While this has proven to some extent true, the February result season, and interim results to now, have shown that well-managed companies have weathered the storm when others have not.

The key to good management has largely been reduced, or at least contained, costs, as sales have declined, as well as being careful with price increases. In the latter case, the easing of covid-induced supply constraints, which has contributed to disinflation (but not overall deflation) has helped.

Premier Investments’ performance is one example of cost control amidst flagging sales, and strong management has been applauded by all brokers. KMD Brands ((KMD)), which owns the Kathmandu and Rip Curl clothing brands, reported recently and was accused of poor execution.

Similar good/bad results amongst retailers were evident in the February result season.

The question now is whereto from here. Brokers acknowledge the upcoming tax cuts, and expected RBA rate cuts by year-end, provide an improving macroeconomic backdrop for consumers. Ord Minnett agrees these factors improve the near-term outlook for consumer spending and sales for cyclical retailers, but suspects the market is expecting a much more pronounced recovery.

We note that yesterday’s Westpac consumer confidence survey for March showed a decline to a pessimistic 84.4 on its index, with 100 being the neutral level.

Ord Minnett further expects soft demand for fashion in the second half of fiscal 2024, as sales volumes gradually normalise towards long-term trends.

Ord Minnett suggests Premier shares trade at a “significant premium” and retains a Sell rating.

On the other hand, UBS is more confident now of earnings margin expansion beyond FY24 and suggests sales can return to growth post a weak first half, noting undemanding year-on-year comparables and new store growth.

UBS is thus more confident Premier can sustain its premium and upgrades to Neutral from Sell.

Goldman Sachs is forecasting 3.5% group sales growth in the second half, expecting no growth for the other apparel brans collectively but 7% growth for Peter Alexander and 10% for Smiggle on easier comparables and new store openings. However, Goldman does not expect another half of strong margins, forecasting a decline of -9.5% year on year.

Goldman Sachs retains a Sell rating.

Jarden also suspects costs will be harder to control in the second half, weighing on margins. This broker is also less upbeat on Smiggle, as value-focused families shift to lower value-options such as Kmart ((WES)) in Australia and Primark in the UK, given signs of share loss in the first half.

Jarden sticks with Neutral.

Strong leadership, multiple growth levers, ample cash at hand, plus de-merger benefits, all support Petra Capital’s Buy rating.

Citi and Morgan Stanley are also focused more on the valuation re-rate expected from de-mergers in supporting their Buy and Overweight (respectively) ratings.

Macquarie is yet to update on the result but has a Neutral rating, leaving a mix of two Buy or equivalent, two Hold and one Sell ratings among brokers monitored daily by FNArena. The consensus target between those brokers has risen to $29.14 from $26.90, but targets range from Ord Minnett’s (Sell) $20.50 to Morgan Stanley’s (Buy) $38.00.

Goldman Sachs (Sell) has a target of $25.10, Jarden (Hold) has $32.00 and Petra Capital (Buy) has $34.25.

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