Super Retail Group: Upgrade to ADD after the market brake checks SUL

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
22 February 2022, 8:30 AM
Sectors Covered:
Gaming and Retail

  • Adjusting for the timing of Boxing Day, SUL’s 1H22 EBIT was 3% above our forecast. Sales were considerably better than expected, with BCF, Supercheap Auto and rebel all delivering double-digit LFLs on a two-year stack.
  • There are no major changes to our full year EBIT estimates.
  • We upgrade our rating from HOLD to ADD as today’s share price decline has put the stock on an FY23F P/E of 12.3x and EV/EBIT of 10.3x, which we see as too low for the quality of the business. Our target price is (login to view).

Event

SUL reported a stronger than expected sales result in 1H22. Revenue of $1.71bn beat our forecast by 5%. Against strong comps, the LFL sales decline was well contained at (5.9)%, or (4.8)% adjusting for the timing of Boxing Day, which fell into the first half last year and the second half this year.

Margins declined modestly as a result of supply chain costs and discounting. EBIT (post-AASB 16) was $182.8m, 1% lower than our estimate of $184.6m. Adjusting for the timing of Boxing Day, we estimate 1H22 EBIT was $189.8m, 3% higher than our forecast.

Analysis

Sales far better than expected.

At the group level, LFL sales were down only (5.9)% and much better than our forecast of (9.0)%. This was against very strong comps. On a two-year stack, group LFLs were +15.4%. On a two-year stack, LFLs were in double-digits in every banner except Macpac.

In BCF, they were +40.6%. All this was achieved despite the timing of Boxing Day, which was worth $27m in sales. Adjusting for Boxing Day, the LFLs were an even more impressive (4.8)% in 1H22, +17.1% on a two-year stack.

The buoyancy of sales continued into 2H22. In the first six weeks of the year, LFL sales growth was +6.0%, adjusting for the timing of Boxing Day, including +12.2% in BCF, which had a record January and continues to benefit from robust consumer demand for boating and camping accessories.

Gross margins were well controlled.

The gross margin declined by 100 bp yoy to 46.7%, but this was still 180 bp higher than the pre-pandemic average of the first half in FY17-19. Higher freight costs had an impact (especially as SUL’s contracted rates were occasionally not honoured), as did a return to more normal levels of promotional activity.

This was offset by selective price increases and efficiencies in sourcing and inventory management. While we expect elevated freight rates and less favourable hedging to weigh on gross margins in 2H22, we believe the operational improvements will support it above historic levels.

Inventory rebuilt to provide a buffer to future disruption.

The strength in SUL’s sales was bolstered by its strong stock availability. Period-end inventory was $909m, up 42% yoy. Inventory cover increased in each banner, except rebel, which experienced some disruption to the supply of footwear from Vietnam.

We believe it sensible for SUL to maintain a good level of inventory while the current uncertainty in global supply chains persists and expect stock levels to remain high in 2H22 (though lower than the PCP by the time we get to June 2022). Importantly, there has been no increase in aged stock provisions.

Forecast and valuation update

We have lowered our EBIT estimates by 1.9% in FY22 and 1.0% in FY23 to take account of 30-40 bp lower forecast margins, offset by c.2% higher forecast sales. Our group LFL estimate increases from (5.8)% to (4.0)% in FY22 and remains +1.4% in FY23.

Our target price is the average of our DCF and EV/EBIT-based valuations. It declines by 1% from (login to view) due to our slightly lower near-term earnings estimates.

Investment view

We upgrade our rating from HOLD to ADD. Our target price falls from (login to view).

We believe today’s 9.5% fall in the share price creates an opportunity to buy shares in a well-run retailer at attractive multiples of 12.3x FY23F P/E and 10.3x FY23F EV/EBIT.

Risks

Risks include an unexpected increase in promotional activity due to competitive pressures; and a faster than expected softening of consumer demand, notably in BCF

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