Small Caps | 11:00 AM
Super Retail has unveiled an ambitious five-year growth strategy centred on store expansion, digital transformation and cost savings.
-Super Retail’s expanding footprint across four brands
-Investor day highlights brand strategies for market share
-Ignite program targets material cost savings
-Valuation appeal versus execution risk
By Mark Woodruff
At last week’s investor day, management at specialty retailer Super Retail ((SUL)) outlined a five-year strategy focusing on footprint and longer-term cost savings.
Management continues to prioritise organic market share gains across its four brands and large addressable markets.
Supporting this strategy is the group’s Ignite transformation program, a multi-year investment in digital capabilities, data, artificial intelligence (AI) and a staged enterprise resource planning (ERP) rollout.
Building on recent loyalty and supply chain initiatives, the program is targeting around -$75m in annual cost savings by FY29, helping fund future growth initiatives.
Expansion targets imply annual store growth of around 3% at the group level, comprising approximately 3% for Supercheap Auto, 5% for sporting goods retailer Rebel, 3% for leisure activity-focused BCF (boating, camping & fishing) and 2% for Macpac, which caters for adventurous travelers.
While management provided no trading update, targets were outlined including mid-to-high single-digit annual growth in pre-tax profit through to FY31, around 7% ahead of the consensus expectation, according to Jarden.
Management also identified scope for an additional 134 stores across the group’s banners by FY31, which this broker notes is around three times current market assumptions.
The group currently operates around 790 stores across Australia and New Zealand.
Super Retail holds only around 10% market share across its core automotive, sports and adventure categories. Jarden highlights this leaves significant scope to increase penetration within an estimated $65bn total addressable market (TAM).
This broker argues improving confidence in earnings growth and an expanding competitive advantage could support a valuation re-rating, with Super Retail currently trading on an implied EBIT multiple of around 11x compared with more than 20x for Wesfarmers ((WES)).
Given management highlighted stronger growth in online retail than physical stores, Macquarie questions the merits of prioritising store expansion.
This analyst concedes a combined online and in-store model remains necessary, particularly to support Click & Collect services in regional markets.
While acknowledging heightened competition from Wesfarmers-owned Bunnings in automotive retail and Sports Direct in sporting goods, Citi still sees meaningful growth opportunities across the portfolio.
These include regional store expansion and private-label growth at Rebel, along with larger-format stores, superstores and increased exposure to the 4WD market at Supercheap Auto and BCF.
The group's loyalty ecosystem, including Supercheap Auto Club Plus and Rebel Active, provides access to millions of customers and is becoming an increasingly important driver of sales growth, customer retention and marketing effectiveness.
Brand strategies
Selling automotive parts, accessories, tools and vehicle maintenance products, Supercheap Auto is the domestic market leader in the automotive aftermarket and benefits from Australia's large and ageing vehicle fleet.
Management’s growth strategy for this brand centres on expanding the product range, including a greater focus on 4WD accessories through new brands and a broader electric vehicle (EV) offering.
Morgans highlights the business is also evolving its store network with a new-generation Gen V format and selective expansion of both smaller and larger stores. Enhanced service capabilities, particularly vehicle fitment and a wider 4WD product range, are expected to support growth.
These initiatives target a core market worth around $17bn, alongside an additional $30bn opportunity in adjacent categories such as trade parts and smart home technology.
Rebel is the group's sporting goods retailer and the second-largest earnings contributor, behind Supercheap Auto. Competing with chains such as JD Sports, Sports Direct and specialist retailers, the business sells sporting apparel, footwear and equipment.
Morgan Stanley notes Rebel has identified regional expansion and the ongoing rollout of rCX-format stores as key growth initiatives.
The broker believes, however, the larger earnings opportunity lays in improving operational execution across merchandising, inventory planning, promotional effectiveness and product availability.
Elsewhere, BCF provides exposure to Australia's outdoor leisure sector. The chain sells camping equipment, fishing gear, boating accessories and outdoor apparel.
Morgan Stanley believes BCF's superstore rollout should help drive market share gains, while expansion into 4WD fitment provides access to an attractive adjacent profit pool.
The partner-led, test-and-learn approach is seen as sensible given the operational complexity and specialist skills required for installation services.
If successfully executed, Morgan Stanley expects the fitment offering to increase average transaction values and strengthen customer loyalty.
For Macpac, the emphasis remains on technical, high-quality outdoor products, increasing brand awareness in Australia and expanding distribution.
This outdoor apparel and equipment business, with operations in the A&NZ region, focuses on technical outdoor clothing, hiking equipment and travel products.
Management plans to grow the store network and leverage wholesale opportunities through BCF and Rebel.
Morgans notes Macpac currently has relatively low penetration in the Australian market and sees significant growth potential across A&NZ's $4bn adventure market, along with further opportunities in adjacent outdoor categories.
Savings & margins
Management sees scope for margin expansion over the medium term. This is particularly the case at Rebel, Jarden notes, driven by improved markdown management, a more favourable sales mix, growth in own-brand products, and ongoing cost reduction initiatives.
After reviewing the Ignite transformation program, Macquarie forecasts around 120bps of earnings (EBITDA) margin expansion between FY28 and FY31 for the group.
The estimate reflects only $30m of annual benefits, leaving scope for upside if the company successfully leverages artificial intelligence and streamlines retail operations.
Investors should, however, account for an extra -$30m per year in costs from FY27 to FY29 due to transformation program investment.
The analyst at Morgan Stanley expects a greater contribution from private and licensed brands for Rebel, with penetration targeted to rise to 20% of sales from around 10%.
If achieved, Morgan Stanley expects gross margin expansion, although the outcome remains dependent on successful execution.
The electric vehicle dilemma
Macquarie views the transition to EVs as a structural headwind for Supercheap Auto, given EVs require fewer replacement parts and less routine servicing than internal combustion engine vehicles.
Lower demand is anticipated for products such as oil, filters and coolants, weighing on long-term growth.
In the analyst's view, Super Retail has yet to articulate a clear strategy to offset this risk beyond expanding its product range to cater for EV owners.
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