Super Retail Group: Strong start to the 2H

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
17 February 2021, 2:00 PM
Sectors Covered:
Consumer Discretionary (Retail)

  1. 1H21 result in line with expectations given guidance (revenue +23%/EBIT +120%).
  2. Like most other retailers, strong trading has continued into early 2H21 with LFL sales +30.5%.
  3. We upgrade our revenue forecasts given the strong 2H trading update, however assume that a portion of these wins are invested into opex/growth projects.
  4. We are encouraged by Super Retail Group's (ASX:SUL) confidence in being able to retain a portion of its recent GM wins and increased BCF sales.
  5. SUL’s brands offer direct exposure to the strong domestic consumption tailwinds currently at play. While timing is uncertain, demand/earnings will normalise from current elevated levels (but likely at a higher base than prior to COVID-19). Based on our FY22 forecasts, SUL is trading on 13.4x. HOLD and increased PT (login to view).

1H21 result – revenue +23% and EBIT +122%

SUL’s 1H21 result was in line with recently provided guidance (top end of range). Key highlights: revenue +23%; EBIT +122%; and underlying NPAT +139%. LFL sales growth was +23.8% (including COVID-19 closures) as the group benefited from a material surge in demand as previously reported.

Gross margins lifted 267bp to 47.66%, due to less frequency and depth of promotional activity given strong demand and stock shortages. EBIT margins lifted materially (+642bp), comprising Auto +532bp; Rebel +607bp; BCF +1023bp and Macpac +208bp.

SUL ended the period with A$417m net cash (working capital benefits + strong cash generation) and declared an interim dividend of 33cps.

Very strong start to 2H21 with LFL sales +30.5%

SUL’s 7-week trading update saw an acceleration in recent trading momentum, with group LFL sales growth +30.5% (SCA +23%; Rebel +17%; BCF +71%; and Macpac +8%). This represented a strengthening in trading conditions vs what was seen into 1H21-end. Given the continued uncertainty due to COVID-19, SUL did not provide FY21 guidance.

The group did provide the following outlook commentary:

  1. Current levels of consumer spending are expected to moderate when govt. stimulus and international travel restrictions ease
  2. Expecting more normalised promotional activity in 2H21
  3. 2H21 opex will reflect a ‘catch up’ of deferred projects and continued business reinvestment

SUL noted that it expects it can maintain structurally higher GMs (vs pre COVID-19) resulting from sourcing and pricing optimisation, disciplined inventory management, and ‘harmonising’ B&M/online margins.

Mapping out our forecasts

Following today’s update, we have made ~2-4% EPS upgrades across FY21-23, with increased LFL assumptions (given 2H trading update) partially offset by increased opex investment.

We flag that should current trading conditions persist we see upside to our FY21 forecasts. In FY21, we forecast 22% revenue growth (23%/20% 1H/2H); 72% EBIT growth (122%/25% 1H/2H); 82% NPAT growth (184%/28% 1H/2H); and 59% EPS growth.

HOLD maintained; increased price target

SUL’s businesses look well placed to continue to benefit from some key thematics including:

  1. Increased domestic tourism and leisure activities
  2. Home-based fitness
  3. A general acceleration in online consumption.

With <10% upside to our revised DCF/PE/SOTP valuation (login to view), we maintain a Hold rating.

Key risks: COVID-19 impacts; a slowdown in consumer spending; heightened competition; further margin compression; and a significant fall in the AUD.

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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.

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