My daughter needed a new winter jacket. It had to be from Macpac, the New Zealand-based outdoorwear maker Super Retail Group bought earlier this year.
Like many teenagers, my daughter is growing quickly and is easily influenced in fashion. Others her age deemed Macpac the brand of choice and the rest was history.
Buying the jacket meant joining the Macpac database and receiving emailed offers. Since then, I’ve noticed the product range, stores and people wearing Macpac. The brand seems to have greater traction and is a reason Super Retail is undervalued.
The market frowned on Super Retail Group when it acquired Macpac Holdings for $135 million from a large private equity firm in February 2015. Super Retail shares fell 15 per cent on the news as the market convinced itself the deal was bad on several fronts.
Private equity firms are not known for leaving much value on the table, when selling. Also, why take a big bet on retail when the sector is struggling and the outlook is poor? And why expand Super Retail’s leisure division, which had underperformed other parts of the company?
Super Retail could not resuscitate its ailing Ray’s Outdoors chain, yet bought Macpac. Then there’s the formidable competition in outdoorwear from the much larger Kathmandu Holdings, a stock I have written favourably about for The Bull in recent years and which has starred.
But for all the gloom about retail and the Macpac acquisition, Super Retail has a total return (including dividends) of 23 per cent over one year, Morningstar data shows. The stock is up from a 52-week low of $6.42 to $9.02 and has renewed momentum.
Much more work is needed. Over three years, Super Retail has returned a lousy annualised 2.9 per cent and over five years it is negative 3.1 per cent. For a stock that was once a market darling (the 10-year return is almost 21 per cent), the fall was stark.
Macpac is small in the scheme of Super Retail Group.The auto division, via the Super Cheap Auto accessories chain, and sports division, through Rebel Sports, make most of the profit. Outdoor Retailing, home to the BCF (Boating, Camping, Fishing )chain, Macpac and previously Ray’s, contributed $29.6 million of FY18 earnings of $219.6 million.
So, it’s wrong to build a case for Super Retail mostly on Macpac, just as it was wrong for the market to slam the company’s stock on the acquisition. But Macpac could be a long-term earnings driver for Super Retail and the key to creating three strong growth engines in the business.
Kathmandu’s performance is telling. The business is going gangbusters as more people buy higher-priced outdoor wear, such as jackets or hiking boots. That’s a good sign for Macpac, another NZ retailer that sells higher-priced, high-quality outdoor wear.
To be clear, my positive view on Kathmandu is based mostly on company-specific factors: new management doing an excellent job with product mix, brand, in-store experience and inventory management. And with exploiting a database of more than 1.7-million customers.
But there’s no denying sector trends that are favouring Kathmandu and Macpac. Growth in travel, particularly among younger consumers, is good news for outdoorwear retailers because more customers buy lightweight jackets and hiking boots for their adventure. A trip to Kathmandu or Macpac or another outdoorwear retailer is almost mandatory before jetting off.
The rise of “athleisure” is another factor. Look at the number of people who wear gym leggings and other trendy athletic wear for everyday use. Or choose lightweight outdoorwear even though they really rarely hike or go camping or skiing (I’m in this category!).
Outdoorwear customers have shown they will pay high prices for items that are more functional, durable and less sensitive to latest fashion trends. Items that will last for years or even decades if they are made well and come from a premium outdoorwear brand.
The upshot is these brands have higher margins and are less susceptible to online competition, (though it is still a threat and an opportunity). Customers are likelier to try on a $300 jacket in-store than buy online and will pay for the right outdoorwear brand and advice.
These trends alone won’t save Macpac or drive Super Retail’s earnings sharply higher. But it’s a good bet that the market has underestimated Macpac’s potential. Kudos to Super Retail management and the board for having the guts to do the deal and go against market sentiment.
I like the strategy to convert Ray’s stores to Macpac and the synergies with the BCF division. There’s an obvious overlap between customers who choose outdoor activities, such as boating and camping, and those who need outdoorwear to go with it. There is also some overlap with customers in the auto-parts business and sport division, and Macpac.
The potential is a larger Macpac chain and higher brand awareness, and a business that could become a formidable competitor to the high-flying Kathmandu. If that happens, Super Retail will have a third engine that drives faster growth and a higher share price.
If it does not, Super Retail has improving momentum, judging by solid like-for-like store sales growth in its auto and sport divisions. The company says Macpac so far is trading “ahead of its business case”, a comment that confirms the impression that the brand has renewed momentum.
Ultimately, valuation matters most. At $9.02, Super Retail trades on a forecast Price Earnings (PE) multiple of about 12 times, consensus analyst estimates show. An average price target of $9.96, based on the consensus of 11 broking firms, suggests the stock is undervalued.
I’ll stick with the bulls on Super Retail. Share-price gains could be slower from here after the recent rally, but there are good signs for the company after its Macpac acquisition.
Oh, and never underestimate the power of fickle teenage shoppers. When you see groups of them flocking for a brand, it’s worth following the action. And spare a thought for parents who pay for pricier outdoor wear (even on sale, like me), which teenagers inevitably outgrow.
Chart 1: Super Retail GroupSource: 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 October 9, 2018.