Super Retail Group: Still early in the half

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
24 October 2019, 2:25 PM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

  • Super Retail Group's (SUL) trading update showed an improvement in divisional like-for-like sales growth momentum over the past 10 weeks. However management has pointed out that this has been assisted by increased promotional activity which has impacted margins.
  • The margin impact was unquantified, however we understand that this was largely to flag to the market that the stronger like-for-like sales growth would not be 'incremental' to GP. We believe it is too early to call how 1H20 plays out, with the upcoming 10 weeks much more important vs the previous 16. We would note that SUL is cycling slightly weaker comps over the key Xmas trading period (particularly Auto/BCF).
  • The next news flow is SUL's Investor Day (8 Nov), with mgmt. flagging 'no major strategy deviations vs the previous strategy outlined'. We think Tuesday's sell-off looks overdone and make negligible changes to forecasts. With the stock trading on 11.2x FY20 PE and a 5.8% yield.
  • We maintain an Add rating. (Morgans clients can login to view detailed reports and price targets)

AGM trading update – stronger than expected LFL sales…

SUL provided its usual 16 week AGM trading update, comprising the following LFL sales growth:

  • Auto +2.7% (cycling +3.1% in the pcp; implies 2.5% over the past 10 weeks)
  • BCF +6.5% (vs +2.4% in the pcp; implies c7.4% over the past 10 weeks)
  • Sports +3.1% (vs +2.4% in the pcp; implies 3.8% over the past 10 weeks) 
  • Macpac -2.1% (vs +8.4% in the pcp; implies -1.6% over the past 10 weeks)

All divisions, with the exception of Auto, showed improved LFL sales momentum over the past 10 weeks.

Macpac remains in negative LFL sales territory due to:

  1. cycling a strong pcp (+8.4% for the first 16 weeks of FY19)
  2. refining the promotional/pricing strategy (i.e. improving GP$) 

… but pointing to a more cautious consumer and softer margins 

While the LFL sales outcome over the last 10 weeks is positive, SUL flagged that consumer sentiment remains 'mixed'.

In response to a cautious consumer, SUL has increased its promotional activity which has successfully generated higher top-line growth however this has impacted margins.

The margin impact was unquantified, however we understand that this was largely to flag to the market that the stronger LFL sales growth would not be 'incremental' to GP.

We have made negligible changes to our forecasts, with the performance over the remainder of 1H20 being a meaningful contributor to FY profitability.

We forecast FY20 EBIT growth of 4% yoy, with a return to a normalised tax rate seeing NPAT +0.6% yoy.  

Investor Day on 8 November; flagging no major strategy deviations

SUL will host an investor day on Friday the 8th of November. We expect to get more detail on the CEO's forward strategy after eight months in the chair.

We will be looking for the shift in investment focus from stores to online, sustainable capex levels and strategies for improving loyalty intra-brand.

Pleasingly, SUL made it clear in today’s CEO address that "there will be no major deviations from the current course and that the Group will be looking to build on the strategic pillars outlined in May".

Christmas is key in terms of 1H profitability – Add

Our DCF, PE, SOTP valuation/PT declines (access price target by logging in) due primarily to increased outer-year capex assumptions.

FY20 presents another year of benign growth, largely due to the EA (unavoidable) and higher tax rate (which benefited FY19).

However, the production of solid comp sales growth is encouraging and while margins remain under pressure, we note that November/December are material in terms of FY profitability.

Additionally, SUL will cycle weaker LFL sales (Auto/BCF) over the remainder of 1H19. With >10% TSR on offer, we maintain an Add rating. 

More information

Morgans clients can login to view our detailed report for Super Retail Group (SUL). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

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.

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