Super Retail Group: FY21 result - These are unusual times
About the author:
- Author name:
- By Alexander Mees
- Job title:
- Co-Head of Research and Senior Analyst
- Date posted:
- 19 August 2021, 11:30 AM
- Sectors Covered:
- Gaming and Retail
- Super Retail’s performance in FY22 was very much as the market expected in this most unusual of years. Group EBIT of $476.8m came in right in line with consensus (though 2% above MorgansF). LFL sales growth was an extraordinary 23%, but in these unusual times that was also in line with expectations.
- DPS was 5% above consensus. LFLs in the first seven weeks of FY22 were -14%, but +12% on a two-year stack. Super Retail has built inventory and is, in our opinion, in a good position to make underlying progress in the current year.
- With this note, coverage of Super Retail Group transfers to Alexander Mees.
Extraordinary LFL performance in FY21, but of course it can’t be sustained
Who would have thought a couple of years ago that Super Retail Group would report +22.8% LFL sales growth for FY21? BCF’s 48% LFL sales growth was especially eye-catching.
Of course, the extraordinary impact of COVID-19 on retail trading patterns distorted customer shopping behaviour and last year’s LFLs are clearly unsustainable. But we think it does Super Retail a disservice to attribute all of the strength in FY21 trading to the pandemic effect.
We believe genuine headway was made in the areas of digital retail and customer engagement (through loyalty programs).
LFLs in the first seven weeks of FY22 were -14%, but still +12% on the same period in FY20. It’s hardly a representative period given its brevity and the fluid state of Australasian lockdowns.
We think it points to how Super Retail is likely to perform this year: LFLs negative, to be sure, but with many of the gains of FY21 being retained. We forecast (5.8)% negative LFLs in FY22, but +8.5% on a two-year stack.
A smart move to build inventory
Concern about the impact of disruption to global supply chains is a constant refrain among retailers at present. Unlike many of its peers, Super Retail was prescient enough to build inventory ahead of the year-end to ensure continuity of supply and avoid undue pressure on gross margins.
In all, the inventory balance was 39% higher yoy at $696m. Given Super Retail’s inventory is not perishable or, with a few exceptions, especially fashion-led, we see limited risk of stock obsolescence and so regard this as a sensible move.
Margin reflects operating leverage but underlying progress being made
At 13.8%, the group EBIT margin was up more than 400 bp (on a post-AASB 16 basis) and 26 bp higher than our forecast. There was significant cost leverage from the significantly higher top-line while gross margins were supported by reduced promotional activity.
There were underlying improvements too, however, including the positive effect of increased online sales, which increased by 43% to $416m. Naturally, some of this will be handed back once all stores are open again. However, we still expect online penetration to keep tracking higher, on an underlying basis.
There was also greater traction with Super Retail’s various loyalty programs. We expect SUL to be a better competitive position regarding stock availability, and this should further support gross margins.
Increasing price target; maintaining HOLD recommendation
Our sales estimates are largely unchanged, but we have become more comfortable about margins in FY22 and FY23 and have increased our EBIT estimates by 1.9% and 1.8% respectively. Our price target increases by just under a dollar to (login to view).
This isn’t quite enough to see us move to a more positive rating and we retain a HOLD. We do recommend, however, that investors keep Super Retail on their watchlist should a more compelling valuation emerge in the future.
Our HOLD rating will be too conservative if Super Retail delivers better LFL sales growth in FY22 than we expect, perhaps due to new store formats or better competitive positioning, around stock availability.
Our rating will be too optimistic if consumers in Australia and New Zealand tighten up spending on Super Retail’s categories, causing LFLs to fall short of expectations and margins to come under pressure as promotional activity increases.
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