Super Retail Group: 1H23 earnings - Whatever you invest in, make it super
About the author:
- Author name:
- By Alexander Mees
- Job title:
- Co-Head of Research and Senior Analyst
- Date posted:
- 17 February 2023, 7:30 AM
- Sectors Covered:
- Gaming and Retail
- Super Retail Group (ASX:SUL) achieved 1H23 PBT growth of 36% to $218m on 15% higher sales.
- We have increased our EPS estimates by 4% in FY23 and 3% in FY24.
- We reiterate our Add rating and increase our target price from (login to view).
SUL traded strongly over Black Friday and Christmas, driving 15% growth in sales in 1H23, including LFL sales growth of +11%. Supercheap Auto achieved LFL sales growth of +15%. A resurgent rebel achieved +11%.
Macpac was +54%, while BCF was the only negative at (2)%. At 46.2%, the group gross margin was resilient in the context of the COGS cost inflation that has affected all retailers. Most impressive of all, from our perspective, was SUL’s operating cost efficiency.
The ratio of operating expenses to sales reduced from 36.0% in the PCP to 34.4%, achieved by internal efficiency initiatives including enhanced workforce planning. Group PBT was $218m, at the top of the guidance range. The interim dividend was 34c, 10% above our forecast.
Morgans comment #1: Strong current trading shows momentum continues
In the first 6 weeks of 2H23, LFLs were +9%, well above our forecast of a (4)% decline. This was achieved against strong comparative numbers of +6% in the first 7 weeks of 2H22. BCF returned to positive territory with +3% (PCP: +12%) after reporting (2)% in 1H23.
Supercheap Auto achieved +8%, rebel +13% and Macpac +30%. Higher ASP (average selling prices) were a key driver of SUL’s strong LFL performance in 1H23 and the early part of 2H23, albeit with moderating transaction volumes.
Consumers are clearly accepting higher prices without any significant reduction in demand. In our opinion, this reflects the generally resilient spending behaviour of the average Australian consumer in an environment of low unemployment and comparatively robust household balance sheets.
We continue to expect LFL sales growth to slow in 2H23 before turning negative in FY24, but note we have been positively surprised by the resilience of SUL’s customers in recent months. As SUL itself said today, it remains ‘optimistic about the Group’s ability to perform through the economic cycle’.
Morgans comment #2: Normalisation of supply chains
SUL commented on its earnings call that ‘global supply chains are now fully recovered’. We believe this will see a reversal of some of the COGS headwinds experienced in recent months, including in the areas of international freight, FX and supplier pricing.
It will also allow SUL to continue the process of normalising its inventory position, which was built up in the aftermath of COVID as a hedge against supply chain disruption and to maximise the sales opportunity from the post-lockdown surge in consumer demand.
SUL’s inventory balance reduced by $33m in 1H23, driven by $156m in lower volumes, offset by $122m worth of higher value and mix.
The inventory to sales ratio eased from 53.3% at December 2021 to 44.7% at December 2022. Further reductions in inventory in 2H23 will flow through FY23 operating cash flow that we expect to be significantly higher than FY22.
Morgans comment #3: Capital management on the horizon
As uncertainty around the global supply chain dissipates, we believe SUL’s strong balance sheet will give it the capacity to reward shareholders with a special dividend (or possibly an on-market buyback) at the end of FY23, while still maintaining a conservative gearing level in the target range of 0-0.5x ND/EBITDA pre-AASB 16.
Changes to earnings estimates
We have increased our EPS estimates by 4% to 110.1c in FY23 and by 3% to 94.5c in FY24.
This is mainly a result of 3% higher sales forecasts in both years.
We retain an Add rating, with an increased target price of (login to view). With over 700 stores, SUL is one of the largest discretionary retailers in Australia and New Zealand. Its brands are household names and ‘destination’ brands, both in-store and online.
SUL has delivered steady positive growth in earnings over the past ten years and pays out 55-65% of these earnings every year as fully-franked dividends. We do expect trading to be tougher in the months ahead, but there is a possibility the deceleration could be milder than forecast.
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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.