Company Reports

No-moat Premier’s adjusted NPAT of AUD 244 million for fiscal 2024 is slightly below our estimate of AUD 249 million. Sales and operating profits from its retailing businesses of AUD 1.6 billion and AUD 341 million, respectively, were already known from a recent trading update.

The upcoming August 2024 reporting season will draw the line under a difficult year for Australian retailers in which they navigated soft demand and soaring labor costs. The combination results in a profit margin crunch and declining earnings for many retailers.

No-moat Myer has made a nonbinding, indicative, and conditional proposal to acquire no-moat Premier’s Apparel Brands business, comprising Just Jeans, Jay Jays, Portmans, Jacqui E, and Dotti. Apparel Brands’ fiscal 2023 sales of AUD 845 million accounted for roughly half of Premier’s group revenue, and the acquisition would materially lift Myer’s sales, which stood at AUD 3.4 billion in fiscal 2023. Premier’s board is considering the proposal. With no firm deal and the price tag unknown, we maintain our fair value estimates for Myer and Premier at AUD 0.75 and AUD 20.50, respectively. At current share prices, Myer looks fairly valued and Premier trades at a significant premium to our value estimate.

We raise our fair value estimate on no-moat Premier Investments by 5% to AUD 20.50 given a slightly better earnings outlook and the time value of money. Premier’s first-half fiscal 2024 profit beat our expectations. Although underlying NPAT fell 6% to AUD 156 million, we anticipated a more significant earnings decline. We upgrade our fiscal 2024 EPS estimate by 6%, implying an 11% full-year decline versus our prior estimate for 16%.

Talk of interest rate cuts and impending tax cuts is sparking a rally in consumer cyclicals. We agree these factors improve the near-term outlook for consumer spending, with cyclical retailers more exposed. We expect the combined impact of fiscal and monetary tailwinds to underpin mid-single-digit growth in total retailing sales in the medium term—compared with our estimate of only 2% growth in fiscal 2024. But underlying our near-term forecast is a significant divergence across categories, with sales in cyclicals virtually flat and defensives up 4%.

E-commerce platforms have been outperforming physical stores recently. Transaction data from National Australia Bank suggests online retail sales in October lifted 10% on last year, while total retail trade was up only 1%, as reported by the Australian Bureau of Statistics.

We expect only modest discretionary goods sales growth in fiscal 2024, while interest rates stay high and household incomes struggle to keep up with inflation. With demand soft, discounts and promotions abound in discretionary retail, and with wages rising as well, earnings are under pressure. But for some, cost pressures are easing. Steep declines in global food commodity prices bode well for fast-food restaurants. Quick service restaurant operator no-moat Collins Foods and master franchisee narrow-moat Domino’s Pizza screen as undervalued.

We maintain our fair value estimate for no-moat Premier Investments at AUD 19.50 per share. Fiscal 2023 sales and operating profits from its retailing of AUD 1.6 billion and AUD 357 million, respectively, were already known, given a recent trading update, and in line with management’s guidance.

We increase our fair value estimate for no-moat Premier Investments by 3% to AUD 19.50 per share. The discretionary retailer’s fiscal 2023 earnings guidance was materially ahead of our prior expectations, with stronger retailing sales and EBIT margins in its second half. Fiscal 2023 underlying operating earnings from retailing beat our estimate by 24%, but our investment thesis stands.

We have only slightly lowered our full-year revenue and earnings estimates for no-moat Premier and no-moat Myer for fiscal 2021, after considering the impact of lockdowns in South Australia, Victoria, and New South Wales in July 2021. Both Premier and Myer have a July fiscal year end. Although lockdown measures differed by state, nonessential brick-and-mortar retailers--like Premier’s apparel retailers and Smiggle, as well as Myer’s department stores--have been significantly restricted in each state. We’ve reduced our fiscal 2021 revenue estimate for both Premier and Myer by about 1%. And we’ve marginally cut our underlying EPS estimates for Premier and Myer to a profit of AUD 1.65 and a loss of AUD 0.01 per share, respectively, from AUD 1.69 and AUD 0.00 previously. Our forecast revisions are conservative without accounting for possible conversion of lost brick-and-mortar sales to the online channel, and ignoring potential reductions in operating costs during the lockdowns.

No-moat Premier Investments’ first-half results for fiscal 2021 were largely a foregone conclusion at the group level. Nevertheless, the announcement provided additional insights into the composition of sales growth and the drivers of the profit margin improvement. While Premier’s management offered a solid trading update for the second half, fiscal 2021 sales and profitability remain highly uncertain in relative terms. This could partly explain the board’s cautious stance on the interim dividend.

Premier Investments has a strong record of buying and selling interests in listed companies, such as Coles Group and Colorado. Its major retail business is Just Group, acquired in August 2008. The stock suits investors seeking retail exposure who are comfortable backing chairman Solomon Lew's retail record.

No-moat Premier continues to drive strong operating results during a disruptive and unique trading environment dominated by coronavirus-related lockdowns and shifting consumer shopping habits. In the first 24 weeks of fiscal 2021, the group’s online channel has successfully captured sales lost because of widespread store closures. At the same time, better pricing, higher online sales margins, government wage subsidies, and lower rents have resulted in a massive increase in EBIT versus the prior corresponding period, or pcp. Management has guided to between 75% and 85% higher retailing EBIT in the first half of fiscal 2021, without providing quantitative details on the composition of the savings or gross margins.

Premier Investments has a strong record of buying and selling interests in listed companies, such as Coles Group and Colorado. Its major retail business is Just Group, acquired in August 2008. The stock suits investors seeking retail exposure who are comfortable backing chairman Solomon Lew's retail record.

Premier Investments has a strong record of buying and selling interests in listed companies, such as Coles Group and Colorado. Its major retail business is Just Group, acquired in August 2008. The stock suits investors seeking retail exposure who are comfortable backing chairman Solomon Lew's retail record.

The key news in no-moat Premier Investment’s result announcement was the extent to which management intends to trim its store footprint in Australia and New Zealand, as well as in the United Kingdom. Globally, just over 400 stores, or a third of the total company-operated store network, made the short-list and might be shuttered.

No-moat Premier Investments surprised us with much stronger fiscal 2020 profits from its retailing operations. We increase our FVE by 3% to AUD 16 due to stronger earnings and an improved near-term sales outlook

Premier Investments’ share price has bounced back quickly from its March lows, when we rated the stock a five-star opportunity for long-term investors. After its initial negative overreaction, the market is now looking through the short-term disruptions and impending economic slowdown facing Premier. Shares are trading close to our unchanged AUD 15.50 fair value estimate, back in three-star territory and screen as fairly valued.

No-moat-rated Premier Investments reported first-half underlying operating profit growth in line with our expectations. Nevertheless, we cut our full-year EPS estimates by 22% and 59% for fiscal 2020 and 2021, because we anticipate severe disruptions to the group’s retailing operations. We forecast the COVID-19 pandemic to weigh on consumer spending globally as well as sharply lower footfall to Premier’s stores. However, we forecast the coronavirus disruptions to be short-lived and expect a strong economic recovery from mid-fiscal 2021, leaving our longer-term earnings forecasts virtually unchanged. As a result, we reduce our fair value estimate by a mere 3% to AUD 15.50. Like us, management and the board aren’t too concerned by the current downturn and maintain their positive outlook for the company’s prospects. Premier’s board’s decision to declare a record interim dividend of AUD 0.34 says it all.

We raise our fair value estimate for Breville to AUD 16.00 per share from AUD 11.20 following the transition to a new analyst. Breville's range of small electrical appliances have established significant brand strength, as demonstrated by the firm's ability to charge a substantial price premium to competitors--notably in the United States and Europe--underpinning the firm's narrow economic moat. Breville are exemplary stewards of capital. The firm's foray into Europe is demonstration of this. We forecast the firm's European expansion, and continued solid growth in North America, will drive an EPS CAGR of 13% over the five years to fiscal 2024. However, there is execution risk in rapid expansion, and our high uncertainty rating remains intact. Despite the 43% rise in our fair value estimate, shares in Breville remain materially overvalued. We also increase our fair value estimate for no-moat Premier Investments by 3% to AUD 16.00 per share given their 28% ownership in Breville.