Super Cheap Solid Despite Downturn

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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

By Chris Shaw

Conditions are certainly tough for retailers, but this hasn’t stopped Super Cheap Auto ((SUL)) from delivering a solid trading update that showed sales performance better than many in the market had expected given the economic environment.

As Macquarie points out, the company has lifted sales in the first 12 weeks of the year by 12.2%, while like-for-like sales for the group are up 4.3%, well above the fall of 2.0% the broker had been forecasting for FY09 as a whole. New Zealand in particular has improved, as like-for-like sales in that market are up 3.3% year-to-date, having been down almost 3.0% for the first eight weeks of FY09.

In the broker’s view, the fact the company has delivered such a solid result is a reflection of most of its products being of the care and maintenance type, which should make group sales somewhat more resilient in current tough times. As well, the broker notes gross margins have increased slightly, meaning the company’s work in improving its logistics infrastructure and direct sourcing initiatives are starting to bear some fruit.

As ABN Amro suggests, this shows the company has a quality management team, which is an obvious positive as the Australian economy appears set to enter into a recession that will make it much tougher for retailers to grow their business.

But Macquarie makes the point the company does have growth options, with its BCF chain a prime example given it remains a very immature operation and so should be able to deliver growth even if it is a more volatile business than the company’s core auto products division. Other growth could come from the upcoming re-launch of the Goldcross division, which ABN Amro expects will occur prior to Christmas.

Post the trading update there have been few changes to earnings forecasts. ABN Amro leaves its earnings per share (EPS) estimates of 27.1c this year and 30.5c in FY10 unchanged. Similarly, Macquarie has not adjusted its FY09 forecast of 26.5c, but has cut 10% from its FY10 number, lowering it to 27.7c to reflect adverse currency movements.

Merrill Lynch is a little more optimistic, as it views new sourcing strategies as potentially offsetting currency movement. The broker is forecasting EPS of 29.8c this year and 33.5c in FY10. The FNArena database shows consensus forecasts of 27.6c and 30.4c respectively, while in ratings terms, the stock scores four Buys and an Accumulate, with Merrill Lynch having the stock as one of its preferred plays in the retail sector.

Today, shares in Super Cheap are unchanged at $2.20 as at 1.20pm, while the stock’s trading range over the past 12 months is $2.01 to $5.05.

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