Premier Investments Earnings: Fashion Shopping to Take the Back Seat

We maintain our fair value estimate for no-moat Premier Investments PMV 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.

At current prices, shares screen as significantly overvalued. Sales momentum is deteriorating, and we forecast further weakening in trading conditions for Australian discretionary retailers. We think the market is underestimating the risk of softening sales and rising labor costs hurting operating profit margins.

We expect consumers to significantly dial back on fashion shopping. As shoppers emerge from shutdowns and refresh their wardrobes, apparel sales are much higher than historical trends both as a share of total retailing dollars as well as sheer volumes. Australian apparel sales volumes have increased at a CAGR of 8% since December 2019, well ahead of its trend growth rate of 4%. We anticipate pent-up demand is now largely satisfied and expect Australian apparel sales to decline in dollar terms in fiscal 2024. We remain bearish on Premier’s medium-term sales and forecast sales to decline by 4% in fiscal 2024 before gradually recovering to maintainable sales growth of 4% by fiscal 2026.

Consumer sentiment noticeably softened in May 2023. Sales momentum slowed significantly in the second half with group sales up merely 1%. In the first six weeks of fiscal 2024, sales were anemic, declining by 2%. Smiggle was the strongest brand in the second half, with sales of children’s stationary rebounding to prepandemic levels—but the tailwind of schools reopening has now played out.

Competition among apparel retailers is intensifying against a backdrop of waning consumer demand. Gross profit margins deteriorated further in the second half, down some 3.1 percentage points on the previous corresponding period, or PCP.