Through August, we saw investors generally become more positive on the outlook for the consumer, with a recovery in sales towards the backend of FY24 and continuing a positive trajectory into the first couple of months of FY25. Share prices were volatile though, with notable stand out performers and laggards. Sales were in line with forecasts and up yoy, but earnings were down driven by inflationary cost pressures, although better managed than expectations. Dividends in FY24 were much better than expected which may indicate that companies are confident in the stability of earnings and cash flow despite no meaningful sign of a recovery in earnings yet. Generally, companies reported a positive start to the year, albeit comping a weak corresponding period. However, they did undershoot our expectations, resulting in lowering our EPS forecasts by (2.4)% (median).
Even in a challenging environment, we think the strongest retailers/ franchises can outperform on a relative basis as they take market share, maintain cost discipline, and apply effective pricing structures, providing improved operating leverage for when cyclical conditions inevitably improve. Our key picks are BLX, SUL and UNI.
Beacon Lighting (BLX)
Beacon Lighting continues to drive strong growth in Trade sales, offsetting softness in Retail sales in a subdued consumer market to result in a stable LFL performance. Gross margins were surprisingly robust in FY24 and we expect this to be sustained in FY25. Beacon Lighting continues to take share and we think it is well positioned to achieve strong earnings growth when consumer sentiment turns.
Outlook commentary:
- "Trading momentum has continued into FY25" with Trade momentum "positive".
- Five new stores are planned for FY25.
Super Retail Group (SUL)
SUL reported sales +2.1% to A$3.9bn; EBIT -8.6% to ~A$400m; and NPAT -11.5%. An in-line result, lifted by a strong FY25 trading update (group LFL sales +3%); an improving rebel outlook; confidence in gross margin sustainability; and a larger than-expected special dividend (50cps vs 25cps MorgansF). A positive update from SUL, supporting its recent strong share price appreciation and pointing to continued momentum into FY25. We continue to maintain a positive disposition on the stock and view it as well positioned to capitalize on any improvements in underlying macro conditions.
Outlook commentary:
- Effective capital management, a better-than-expected start to FY25, resilient SCA, and improving rebel—are sufficient to offset slightly higher FY25 capex/opex expectations and support recent share price consolidation.
- We are encouraged by the start to FY25, supporting our view that SUL is well positioned to continue to manage an uncertain consumer outlook.
Universal Store (UNI)
UNI reported a strong FY24 result with underlying earnings up 16% on FY23, coming in ahead of pre-released guidance. The strong result could be attributed to sales growth of 9.7%, improved gross margins, up 110 bps to 60.1% and well managed costs. UNI declared a dividend of 18.5c bringing the total to 35.5c which was up 25.6% and ahead of our expectations. The strong momentum seen in 2H has continued into the first 7 weeks of FY25, with double digit like-for-like (LFL) growth across all brands.
Outlook commentary:
- For the first 7 weeks of FY25, US sales up 15.3%, against (9)% decline in the pcp, with LFL sales up 12.5% Perfect Stranger sales up 89.9%, against +4.9% in the pcp, with LFL sales up 24.2%. CTC sales in the direct-to-consumer (DTC) channel up 13.3%, compared to +4.1% in the pcp and LFL sales up 22.4%.
- UNI expects to open 4-6 new Universal Stores as well as 2 major refurb and 3 relocations in FY25, 4-6 Perfect Stranger stores and 1-3 new THRILLS stores.
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