Analyst Research

Premier Investments (PMV) – NEUTRAL

September 27, 2018
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September 27, 2018

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Premier Investments (PMV) – NEUTRAL

COMPANY DATA

Date of ReportASXPricePrice TargetAnalyst Recommendation
27/09/18PMVA$18.10 A$18.90 NEUTRAL
Date of Report

27/09/18

ASX

PMV

Price

A$18.10

Price Target

A$18.90

Analyst Recommendation

NEUTRAL

Sector : Consumer Discretionary52-Week Range: A$12.34 – 20.16
Industry: Specialty RetailMarket Cap: A$2,861.6m

Source: Bloomberg

INVESTMENT SUMMARY

We rate PMV as a Neutral for the following reasons:

  • Strong brands in Smiggle and Peter Alexander
  • Significant growth strategy via store rollout of Smiggle and Peter Alexander stores in UK, Asia and Eurozone.
  • PMV controls its own brands (design, sourcing and distribution) rather than distributing other brands.
  • Strong online sales presence, which allows the company to compete with the likes of Amazon and eBay, as these online platforms cannot sell PMV brands.
  • Significant exposure to the consumer overseas (UK, Europe & Asia), as opposed to be 100% leveraged to Australian sales.
  • Strong management team, including Chairman Solomon Lew and CEO Mark McInnes.
  • Strong balance sheet provide buffer in hard time and flexibility in times of growth.

We see the following key risks to our investment thesis:

  • Increase in competitive pressures (reported entry of Amazon into the Australian market).
  • Increase in cost of doing business.
  • Loss in brand equity for the key brands – Smiggle and Peter Alexander.
  • Store roll-out strategy stalls or new stores cannibalise existing stores.
  • The Company unable to arrest the sales decline in its more mature brands.
  • Adverse currency movements.

Figure 1: PMV sales by brand

Source: Company

ANALYST’S NOTE

For FY18, Premier Investments (PMV) reported group sales growth of +8.2% over the previous corresponding period (pcp), with like-for-like sales up +3.3%, driven by continued growth in Smiggle and Peter Alexander brands, as well as positive momentum within the apparel brands.

Group EBIT of $150.1m came in below our estimates of $157.7m largely driven by additional costs in upgrading PMV’s online platforms across the business (which one may regard as one-offs). The impact of a tough retail trading environment was evident via the 60bps decline in gross profit margins, however solid cost management (with CODB margin down 90bps) resulted in the Company reporting a 25bps improvement in EBIT margin.

On a positive note management noted that the first 5 weeks of FY19 reported a 150bps uplift in gross margins. However, the major talking point from the results was the Smiggle strategy update, which included the announcement of adopting a wholesale strategy to reach new markets. Whilst execution and brand integrity risks are elevated, we are supportive of the strategy.

  • FY18 result highlights. Over the pcp and on an underlying basis, group sales were up +8.2% to $1.18bn, with like-for-like sales up +3.3%, driven by continued growth in Smiggle and Peter Alexander as well as positive momentum within the apparel brands. Underlying EBIT was up +10.3% to $150.1m, with EBIT margin up +25bps on better cost control, particularly employee expenses (down 120bps as a percentage of sales). Gross profit margin decline of -60bps highlighted the competitive retail trading environment. Cost of Doing Business for the year decreased by 90bps as a percentage of sales to 49.9%.
  • New Smiggle guidance and growth strategy beyond FY20. Management is now targeting $450m in global Smiggle retail sales by FY20 (previously $400m) and shifting its focus away from company owned stores to online, concession and wholesale (not previously used). The push towards online makes sense (and previously flagged) as it represents higher margins given the success PMV has had with developing its online penetration (e.g. 15% of UK sales are online now). Concession model can allow PMV to gain quick access to high traffic locations which may be otherwise difficult to obtain. However, with respect to margins we would think the benefit wouldn’t be too different to standalone stores as the element of rent remains. What was interesting was the announcement of wholesale model for markets where PMV is unlikely to operate a standalone business (new emerging Asian markets). While brand integrity is paramount and execution risk is high, we broadly believe this is a positive as it is sales achieved at minimum existing company EBIT margin (or greater) with little downside financial risk.
  • Legacy brands surprise on the upside. On a positive note PMV’s apparel brands reported positive like-for-like sales during the second half FY18.
  • Peter Alexander – 2020 Growth Plan tracking well ahead of expectations. Management noted that the 2020 Growth plan is progressing ahead of expectations, with annual sales expected to exceed $250m by FY20. 21 new stores were opened in FY18 – putting the brand ahead of the 2020 plan to open 40 new stores between FY18 and FY20. Five new stores have been confirmed for opening in 1H19.

FY18 RESULTS SUMMARY...

Key headline numbers for FY18 on pcp are presented in the table below.

Figure 2: PMV FY18 P&L summary – key metrics

Source: Company, BTIG estimates

FY18 result highlights. Over the pcp and on an underlying basis, group sales were up +8.2% to $1.18bn, with like-for-like sales up +3.3%, driven by continued growth in Smiggle and Peter Alexander as well as positive momentum within the apparel brands. Underlying EBIT was up +10.3% to $150.1m, with EBIT margin up +25bps on better cost control, particularly employee expenses (down 120bps as a percentage of sales). Gross profit margin decline of -60bps highlighted the competitive retail trading environment. Cost of Doing Business for the year declined by 90bps as a percentage of sales to 49.9%. The group delivered ongoing cost efficiencies, despite structural inflationary pressure and the significant investment in the growth initiatives including Online, Smiggle International and Peter Alexander. Underlying net profit before tax was up +9.2% to $160.3m and net cash flows from operations for FY18 were up +37% to $133.9m. The Chairman noted, “I am delighted to report that the online business surpassed our original 2020 target of $100 million more than two years ahead of plan, delivering sales for the year of $112.5 million – up 65% on FY17.” Management declared a final dividend of 33cps (fully franked), taking the dividend for FY18 to 62cps, an increase of +17% compared to pcp.

Smiggle’s delivers record results. Smiggle achieved record global sales of $293m in FY18, up +22.7% compared to pcp. The brand opened 52 new stores globally and Online sales exceeded 10% of sales in countries with a transactional website. 67% of the FY18 sales were delivered from outside of Australia. At the end of FY18, Smiggle had 347 stores across Australia, New Zealand, Singapore, England, Scotland, Wales, Northern Ireland, Hong Kong, Malaysia and the Republic of Ireland. Smiggle Asia had an exceptional year, with Singapore, the most mature of the Asian markets, enjoying strong LFL growth with tourists providing valuable insights into potential new Smiggle markets. Smiggle Hong Kong opened four new stores during the year, taking the total count to 14 stores, in line with the original plan. Smiggle Malaysia opened six stores during FY18 taking total stores to 17, well ahead of previous guidance. Smiggle UK delivered strong sales growth for the year with the brand navigating Brexit better than most retailers due to the unique nature of the brand and strategy execution. There were 134 stores trading in the UK at the end of FY18. The UK Online channel delivered 15% of total UK sales for the year.

Peter Alexander – 2020 Growth Plan tracking well ahead of expectations. Peter Alexander delivered record sales in FY18 of $218.7m, up +14.5% over pcp and strong LFL sales. Management noted that the 2020 Growth plan is progressing ahead of expectations, with annual sales expected to exceed $250m by FY20. 21 new stores were opened in FY18 – putting the brand ahead of the 2020 plan to open 40 new stores between FY18 and FY20. Five new stores have been confirmed for opening in 1H19. The expanded range of P.A. Plus size delivered exceptional 100% growth for the year.

Smiggle’s accelerated global growth strategy announced. Smiggle announced a major strategic accelerated global growth plan with the aim to deliver the targeted $450m in global Smiggle retail sales by FY20 and to set up pathways for major growth beyond FY20. The accelerated global expansion would come from 4 major channels; Online, Global concession partnerships, Global wholesale arrangements and New store growth.

Figure 3: PMV Financial Summary 

Source: Company, BTIG, Bloomberg

COMPANY DESCRIPTION

Premier Investments Ltd (PMV) wholly owns retail conglomerate the Just Group and also holds a 27.5% stake in listed electrical consumer products manufacturer Breville Group Ltd (BRG) and 10.8% stake in listed department store, Myer Holdings (MYR). The Company has the following brands in its portfolio: Smiggle, Portmans, Just Jeans, dotti, Jacqui-E, Jay Jays and Peter Alexander. The Company operates in Asia, Europe, the UK and Australia.


Recommendation Rating Guide

Recommendation Rating GuideTotal Return Expectations on a 12-mth view
Speculative BuyGreater than +30%
BuyGreater than +10%
NeutralGreater than 0%
SellLess than -10%

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