I enjoy covering retails for two key reasons. One, the sector, as much as many, relies on people power: savvy retailers who understand consumer tastes and respond quickly. Picking top retail stocks partly relies on picking top retail CEOs at the helm.
Two, the sector is prone to bouts of irrational pessimism. Amazon sets up in Australia, so investors sell retail stocks en masse, even though the online threat affects some companies more than others. Consumer confidence falls and most retail stocks are hammered.
It’s remarkable how the market takes an overly “top-down” view with retailers and overlooks what matters: company fundamentals and valuations. That creates opportunity for value investors who look through market noise and capitalise on oversold stocks.
My strategy for picking retail stocks, outlined previously for The Bull, has a few foundations. I prefer retailers that are expanding successfully offshore. Discount jewellery fashion chain Lovisa Holdings is an example. Lovisa has soared since I covered it in 2015 for The Bull.
Also, choose retailers that have a natural defence against online competitors. In Lovisa’s case, young women seem to enjoy visiting the stores in groups and trying on jewellery (I always research retailers with site visits, even those whose products I know little about!).
I cannot imagine Lovisa’s target market would get the same experience buying cheap jewellery online by themselves. It’s no different to fiftysomething males who visit Bunnings on a Saturday to buy hardware and a cheap sausage from the barbeque. Or pet owners who love visiting a Pet Barn to buy their animal products. Online shopping is not the same.
Premier Investments, through its booming Smiggle chain, satisfies both criteria. I cannot imagine eight-year-olds who flock to its stores would find a similar experience in discount stationery chains or by shopping online (which some kids already do).
I spent too many hours over the years in Smiggle stores thanks to having children who were stationery addicts. Smiggle typifies the benefits of retailers building strong, consistent brands and product concepts that competitors cannot easily replicate online.
Smiggle also ticks the second box: rapid offshore expansion. The division has almost 400 stores and is rapidly opening outlets in the United Kingdom and Asia. Premier opened 52 Smiggle stores globally in its past financial year. Two thirds of sales come from offshore.
I have highlighted Smiggle’s potential several times in The Bull. To my thinking, Smiggle is one of Australia’s great exports. I wrote in March 2015 in this publication: “Smiggle has potential to surprise the market with faster-than-expected store growth, and higher gross margins. It is well on the way to being one of Australia’s great retail exports, and a much larger contributor to Premier Retail’s profits.”
Premier, $12.66 at the time of that report, has rallied to $18.01 and has good prospects to head higher gradually over the next two years, powered by Smiggle’s growth.
Premier this month announced 8.2 per cent sales growth in FY18 to $1.18 billion and 10.3 per cent growth in underlying earnings (EBIT) to $147.9 million. With that, Smiggle sales soared 22 per cent and are up 58 per cent over two years – incredible growth for a retailer.
Premier’s other key growth engine, Peter Alexander, had 14 per cent sales growth in FY17 as more customers snapped up its trendy pyjamas and other bedroom wear. The company’s online sales soared 65 per cent to $112.5 million.
Premier also includes Just Jeans, Jay Jay, dottie, Jacqui-E and other fashion brands. Like other discretionary fashion items, these brands face growth headwinds. Predictably, Premier’s presentation pack includes slide after slide on Smiggle and not much else.
Market chatter suggests Premier could spin off Smiggle into a standalone listed company, to separate it from its slower-growth retail brands and unlock its full valuation. There is merit in that idea given Smiggle is far more globally focused than Premier’s other brands.
Either way, Premier offers reasonable value for long-term investors. At $18,01, it trades on a forward Price Earnings (PE) multiple of about 20 times, which is not overly demanding for a company that is rapidly growing overseas and performing above expectation.
Macquarie describes Premier’s valuation as “undemanding in the context of superior medium/long-term growth potential and strong current trading momentum”. Macquarie has an outperform recommendation and a 12-month target of $20.90.
An average share-price target of $18.09, based on the consensus of 10 broking firms, suggests Premier is fully valued at the current price. I’ll stick with the bulls on this one, although Premier’s gains in FY19 might be slower as management reinvests for growth.
I suspect the market is also overlooking Premier’s stake in Breville, another of my favoured retailers, and the potential for better performance from Myer Holdings (another Premier investment) this year. Premier shares fell on the latest result – a case of profit-taking on the news, as the market bid up the price in the lead-up to the announcement. That creates a better entry point for long-term investors.
Chart 1: Premier InvestmentsSource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at September 19, 2018.