Super Retail Group: Trading and margins still elevated

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
04 May 2021, 3:30 PM
Sectors Covered:
Consumer Discretionary (Retail)

  • Super Retail Group's (ASX:SUL) 3Q21 trading update showcased continued strong top-line momentum across all divisions.
  • Margin comments indicate a stronger than expected trajectory with the demand environment keeping a lid on promotional requirements longer than expected.
  • SUL will start to cycle strong comps in May/June and over the remainder of the CY. However, the domestic consumption/leisure spending backdrop is also likely to remain favourable.
  • We expect SUL will utilise this strong trading/excess capital to invest in future proofing its businesses – meaning the eventual normalisation of earnings is likely to be well above pre-COVID-19 levels, in our view.
  • Hold rating; new target price (login to view).

3Q21 trading update – strong momentum continues

SUL provided a trading update, showing a broad continuation of trading conditions over 3Q21.

Key highlights (first 44 weeks of FY21) include:

  • Auto LFL sales +21% (implies 23% over the past 11 weeks)
  • Sports LFL sales +20% (implies 28% over the past 11 weeks)
  • BCF LFL sales +59% (implies 72% over the past 11 weeks)
  • Macpac LFL sales +17% (implies 93% over the past 11 weeks).

SUL also provided a helpful LFL comparison vs FY19 (given comps are now becoming less relevant in the wake of COVID-19). LFLs vs FY19 levels include: SCA +22%; Sports +19%; BCF +49%; and Macpac +3%.

GM remains buoyant; reinvestment still expected

Management noted that given strong consumer demand, promotional levels have remained relatively subdued. This has seen the GM improvement in the 1H maintained in the 2H (compares to previous management commentary referring to a return to more normalised promotional activity in 2H21).

Other key callouts:

  • SUL is in a well-stocked position
  • Higher shipping costs have been ‘partially offset’ by FX
  • 2H21 will see an opex catch-up due to deferred projects/re-investment (previously flagged)

Overall, we think SUL’s margin trajectory comments are well above our consensus base case.

Mapping out our forecasts

Following today’s update, we have made 8%/1%/1.2% EPS upgrades across FY21/22/23, reflecting modest LFL sales changes but largely higher margin assumptions (skewed to FY21).

We flag that should current trading conditions persist we see further upside to our FY22 forecasts. However, the company will also start to cycle very strong comps for the first time (particularly from June).

In FY21, we forecast 22% revenue growth (23%/21% 1H/2H); 86% EBIT growth (122%/51% 1H/2H); 96% NPAT growth (139%/56% 1H/2H); and 72% EPS growth. At a group EBIT margin level, we assume 217bp of expansion in 2H21 vs the 641bp of expansion achieved in 1H21.

Investment view – HOLD

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

  • Increased domestic tourism and leisure activities
  • Home-based fitness
  • A general acceleration in online consumption

On the back of earnings upgrades, partially offset by higher capex assumptions, our DCF/PE/SOTP valuation increases (login to view). Hold rating maintained.

Key risks include:

  • COVID-19 impacts
  • A slowdown in consumer spending
  • Heightened competition
  • Further margin compression
  • 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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