Premier Investments: Additional details required

This story is about PREMIER INVESTMENTS LIMITED and other companies. More information STOCK ANALYSIS: PMV

Premier Investments’ previously announced fiscal 2024 sales results are below consensus, but brokers are awaiting further details once the full results are released, as well as an update on the company’s strategic review.

– Premier Investments’ fiscal year 2024 sales fall short of expectations
-Lack of details, which leads to a lot of speculation
– This is not a bad result, considering
– Division and merger plans key for fiscal year 2025

By Greg Peel

Premier Investments ((PMV)) is a primarily discretionary clothing retail company whose brands include Just Jeans, Jay Jays, Portmans, Dotti and Jacqui E, some of which have been around since time immemorial.

Premier also owns Peter Alexander, which sells pyjamas and related clothing, and Smiggle, which sells stationery and other accessories (such as backpacks) for school children. While brands such as Just Jeans will sell to overseas customers online, Peter Alexander and Smiggle have exposure in offshore stores.

Despite the more specific categories, Peter Alexander and Smiggle are considered Premier Investments’ ‘core brands’, accounting for 52% of sales at higher margins than the ‘non-core’ brands of other brands, which are grouped under the ‘Clothing Brands’ label.

Premier Investments also owns a 28.06% stake in Breville Group ((BRG)), while Premier’s CEO, Solomon Lew, through his private company, has amassed a significant stake in Myer ((MYR)), making him Premier Investments’ largest shareholder.

It is therefore no surprise that plans are underway to spin off the more dynamic Peter Alexander and Smiggle Brands brands, with Myer set to acquire the more legacy Apparel Brands brand.

Meanwhile, Premier Investments has provided preliminary sales forecasts for FY2024 in a trading update, ahead of its full FY2024 results due on September 25. For brokers, the update has raised more questions than it answers.

The trade data update was not expected, but as UBS notes, it comes after an article in Australian regarding the performance of clothing brands within Premier Retail.

Below consensus

Premier Investments Group’s fiscal 2024 sales of $1.6 billion fell about -2% below broker expectations. Profits also fell, with margins also falling short of consensus (though beating Macquarie’s forecast).

Sales fell by -2.6% year-on-year, Macquarie notes. Given that sales in the first half of the year fell by -2.8%, that means sales in the second half of the year fell by -2.4%.

Please note that the Prime Minister’s fiscal year ends in July.

Brokers, however, do not see this as disappointing. The external environment for Premier Retail has been tested, with consumers in Australia and New Zealand struggling with cost-of-living pressures. These consumers are trading lower across all categories, UBS notes, including clothing.

Macquarie’s High Frequency Consumer Data shows that shopping spending performed well in August, with volume and spending on clothing largely in line with the same month a year ago. Total discretionary spending fell to 53% of the consumer wallet in FY25 so far from 54% the previous year, with essential spending slightly up.

Waiting for details

Management did not provide any detailed brand breakdown in the update, prompting brokers to speculate on the reasons for lower sales and margins.

A more optimistic scenario, suggests Morgan Stanley, is that the failure was due to lower-rated clothing brands and higher-rated Smiggle and Peter Alexander.

Bell Potter estimates that the large performance gap between core and non-core brands will impact positive comparative results for Smiggle and Peter Alexander in the second half of the year.

Citi said it was unclear whether the margin shortfall was due to gross profit, operating expenses or sales mix. Citi believes it is likely that increased discounting in June led to the gross profit margin shortfall, based on industry feedback.

Other reasons could include poor planning and poor rental performance, although the broker suggests this is less likely. Citi says Peter Alexander and Smiggle, which are underperforming, could provide another explanation, but that would contradict assumptions made by other brokers.

If the reason for the omission was deeper discounts, then Citi would have to ask itself whether the inventory was refreshed prior to FY25. If the explanations were cost or sales mix, then there could be long-term implications for profit margins.

Citi, like everyone else, would like further clarification from management.

The sales decline in FY24 is moderate, suggests UBS, reflecting the breadth of its brands, including higher-growth brands Peter Alexander and Smiggle. Premier Retail has been able to reset its operating cost base in recent years, the broker notes, particularly occupancy costs, as well as managing labour well despite rising wages, with this expected to continue in FY24 as profit margins fell to just 20.4% from 21.7% a year ago.

The last straw is the announcement that Smiggle’s managing director will leave immediately after being accused of “serious misconduct.” He is due to start as CEO of Lovisa Holdings ((LOV)) in June next year.

Strategic Review

While brokers await more detailed information on the sale during the upcoming results release, perhaps more important is an update on the company’s strategic review, which relates to the aforementioned considerations regarding the spin-off of Peter Alexander and Smiggle and the sale of Apparel Brands to Myer.

This update contains no comments.

Bell Potter bases Premier Investments’ valuation on a sum-of-parts model, with an unchanged 13x PE multiple for the core brands, a lower 4.5x multiple for Apparel Brands, down from 5x, and the current market valuation for Myer and Breville Group. As the earnings spread between the core and non-core brands widens, the broker is lowering its margin assumption for Apparel Brands as part of the valuation, while also changing its earnings expectations.

This leads to an increase in the target price from $35.00 to $37.00, with the increase driven by a potential spin-off of Premier’s two key brands, Smiggle and Peter Alexander, which are highly profitable and worthy of a global launch, as well as a potential Apparel Brands/Myer combination.

Bell Potter sees catalysts related to trading trends in the first half of FY25 in FY24 results and split updates and as a result believes Premier’s price-to-earnings multiple of 16x on FY26 guidance is attractive, hence a Buy rating.

Premier Investments is a key Morgan Stanley pick in the retail segment, where it continues to see crossover catalysts, earnings upside from growth levers and cyclical tailwinds, and an attractive risk-reward mix. Morgan Stanley has an Overweight rating and a $33.90 target.

UBS maintains a neutral rating, noting that while Premier Retail’s sales in fiscal 2024 were down year-on-year, growth is forecast in future periods, led by Peter Alexander and Smiggle, and costs were well managed in a challenging environment.

UBS agrees that these factors make the risk/reward balanced following a period of share price outperformance. UBS has a target of $33.00.

Macquarie set a price target of $33.50 and left its Neutral rating unchanged, pending more details after fiscal 2024 results.

Jarden suggests that the key focus in the near future should be the FY2024 results, with the broker hoping to get more information on the potential sale of clothing to Myer, as well as an update from management.

Still, improving medium-term ROE, potential split catalysts, and a relatively modest multiple and strong equity position earn Jarden a Neutral rating with a Positive stance, despite a price target of just $29.80.

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