Company Reports

Trading momentum is soft across all of no-moat Super Retail’s brands: Supercheap Auto, Rebel, BCF, and Macpac. In the first 10 months of fiscal 2024, group sales are up 2% on the previous corresponding period. Sales growth is deteriorating in the second half of fiscal 2024, as expected, but tracking ahead of our prior forecast. We marginally upgrade our sales estimates by 2% in fiscal 2024. Gross margin is also holding up better than we had anticipated, flat with the previous corresponding period. We upgrade our fiscal 2024 adjusted earnings per share estimate by 5% to AUD 1.06. However, our long-term estimates are largely unchanged.

Talk of interest rate cuts and impending tax cuts is sparking a rally in consumer cyclicals. We agree these factors improve the near-term outlook for consumer spending, with cyclical retailers more exposed. We expect the combined impact of fiscal and monetary tailwinds to underpin mid-single-digit growth in total retailing sales in the medium term—compared with our estimate of only 2% growth in fiscal 2024. But underlying our near-term forecast is a significant divergence across categories, with sales in cyclicals virtually flat and defensives up 4%.

No-moat Super Retail’s first-half fiscal 2024 sales of AUD 2.0 billion and pretax profit of AUD 204 million were in line with guidance from January 2024. The board declared an interim dividend of AUD 0.32 per share, fully franked, representing a 50% payout ratio.

Super Retail Group operates in Australia and New Zealand, selling automotive parts and accessories, sporting goods, and outdoor leisure equipment.

We maintain our fair value estimate on no-moat Super Retail at AUD 10.50 per share, with shares screening as materially overvalued. This reflects our more cautious view on the group’s profit margin outlook.

E-commerce platforms have been outperforming physical stores recently. Transaction data from National Australia Bank suggests online retail sales in October lifted 10% on last year, while total retail trade was up only 1%, as reported by the Australian Bureau of Statistics.

We raise our fair value estimate for no-moat Super Retail Group by 5% to AUD 10.50 per share, with shares screening as overvalued. The increase in our intrinsic assessment is principally due to better-than-expected performance of discretionary leisure goods retailing, including sporting and camping goods.

We expect only modest discretionary goods sales growth in fiscal 2024, while interest rates stay high and household incomes struggle to keep up with inflation. With demand soft, discounts and promotions abound in discretionary retail, and with wages rising as well, earnings are under pressure. But for some, cost pressures are easing. Steep declines in global food commodity prices bode well for fast-food restaurants. Quick service restaurant operator no-moat Collins Foods and master franchisee narrow-moat Domino’s Pizza screen as undervalued.

We increase our fair value estimate for no-moat Super Retail by 5% to AUD 10 per share, principally due to the time value of money. Fiscal 2023 sales of near AUD 2 billion beat our estimate by 2%. And while we calculate pretax profit margins declined by almost 100 basis points in the second half versus the previous corresponding period, we had expected intensifying competition to weigh more on gross profit margins, as well as greater operating deleverage as the cost of doing business pressures build across the retailing sector. Fiscal 2023 underlying earnings beat our estimate by 9%, but our investment thesis stands.

No-moat Super Retail Group’s preliminary earnings for its first-half fiscal 2023 were significantly stronger than we had expected. The beat was driven by solid sales performance over the key Christmas trading period, as well as profit margins expanding in the first half—instead of our expectation of a moderation in margins. The short-term earnings strength lifts our fair value estimate by 6% to AUD 9.50 per share. Shares in Super Retail trade at a material premium to our intrinsic valuation, which we believe reflects the market’s more positive outlook on consumer demand.

Super Retail Group operates in Australia and New Zealand, selling automotive parts and accessories, sporting goods, and camping, fishing, and boating equipment.

Our prior report included an incorrect fiscal 2019 dividend forecast. Our corrected forecast is AUD 50 cents, representing a 6.7% yield at our fair value estimate.

Shares in no moat-rated Super Retail Group remain overvalued following the company’s trading update for the 43 weeks to April 27, 2019. We maintain our fair value estimate of AUD 7.50. The negative impact of weaker-than-expected sales growth in the core auto and high growth outdoor segments were offset by the positive impact of the time value of money on our fair value estimate. We anticipate Super Retail to struggle to grow EBIT margins over the next decade, with group operating margins hovering around 8.7% over the period. Over the next three years, we expect stiff competition in the commoditised sport goods retailing segment to drive down its EBIT margins to 8% from over 9% currently. The auto segment enjoys some shelter from online competitors, as Supercheap Auto’s physical store network adds value for customers with in-store services. We expect EBIT margins in the auto segment to expand and largely offset the declines in sporting. Further to these competitive headwinds, a new enterprise agreement, or EA, will likely weigh on near-term EBIT margins, especially in fiscal 2020. The proposed EA covers about 10,000 employees and would see store wages inflate by 5.8% in fiscal 2020, and by a further 2.9% in both fiscal 2021 and 2022.

Our AUD 7.50 fair value estimate on no-moat Super Retail Group stands. Cash flows, balance sheet and the P&L down to the EBIT level were released on Feb. 12, 2019. Today, the company followed up with NPAT and dividends for the half-year fiscal 2019.

No-moat-rated Super Retail Group's underlying net profit after tax of AUD 145 million beat our estimate by 6%, largely driven by a stronger outdoor segment. The EBIT contribution from the newly acquired Macpac business even surpassed management’s expectations in the first three months of ownership. The results of the company’s two key segments accounting for almost 90% of group EBIT, auto and sports, were broadly in line with our expectations. Our long-term sales growth and EBIT margin forecasts for the individual segments are substantially unchanged. However, we lift our fair value estimate by 4% to AUD 7.50 per share, reflecting the time value of money.

No-moat-rated Super Retail calmed investors’ nerves by guiding to flat year-on-year group EBIT margins for fiscal 2018, excluding a contribution of AUD 5 million from the Macpac acquisition, which closed in early April. We maintain our group EBIT estimate of AUD 213 million, or AUD 208 million excluding Macpac, equating to an underlying group margin of 8.3%, 10 basis points lower than in fiscal 2017. At a group EBIT margin of 8.4%, in line with company guidance, we estimate EBIT increases by 2% to AUD 216 million. The accompanying trading update and other details were mixed, but not material to our near-term forecast or fair value estimate. Our five-year EPS and group revenue CAGR estimates of 4.0% and 4.5%, respectively, are unchanged. We reiterate our AUD 7.20 fair value estimate. The Super Retail share price rallied 9% on the update, surprising us, and shares now screen as slightly overvalued.

We were expecting Super Retail Group to face margin pressure and struggle to grow its store network given the increase in competition and migration of its customers to the online channel. This is reflected in our view the group lacks an economic moat. But despite our already muted longer-term outlook, we were still negatively surprised by the first-half fiscal 2018 like-for-like sales figures and operating margins across all three segments. We reduce our fair value estimate to AUD 7.20 from AUD 7.70 to account for this greater near-term pressure than we anticipated, but have maintained our underlying long-term EBIT margin and sales growth forecasts. At current prices, shares are screening as roughly fairly valued.

Over the first 16 weeks of fiscal 2018, like-for-like sales growth in Super Retail’s two key segments, auto parts and sporting goods, tracked with our estimates for the full year, and were virtually unchanged from the growth rates exhibited in the first seven weeks of the year. Comparable sales in leisure retailing slowed markedly from the first seven weeks, but the segment is less material to the group. We estimate the leisure segment to account for only 11% of group EBIT in fiscal 2018. Operating margins in the auto parts segment and the slowing leisure segment increased, in line with our expectations. We anticipate EBIT margins in the sporting goods segment to also increase in fiscal 2018, due to material sourcing, marketing, and administration synergies from the Rebel-Amart Sports integration. The last six Amart stores are expected to be fully converted to the Rebel brand by the end of October 2017.

We cut our fair value estimate of Super Retail to AUD 7.70 from AUD 9.00, driven by a more muted outlook on sporting goods and leisure segments, partially offset by a more optimistic view on the auto parts business. Amazon is poised to shake up the Australian retail landscape in most categories when it commences its operations sometime during the next 12 months, and Super Retail is not immune. We expect competition to intensify across all the group’s segments, resulting in price cutting, lower margins, and greater investment needs in digital channels and in-store service. We anticipate the company can offset these factors by gradually consolidating the brick-and-mortar channel, as smaller, unprofitable competitors exit due to compressing EBIT margins, but now view shares as slightly overvalued. We rate management’s stewardship of shareholder capital as Standard.

We retain our fair value estimate of AUD 9.00 for no-moat Super Retail Group following fiscal 2017 results. Underlying EPS of AUD 0.68 slightly exceeded our AUD 0.66 estimate. Management reiterated five-year financial targets for each segment, and their continued focus on investment in both physical and digital presence to bolster their omnichannel offering. We remain more pessimistic on EBIT margins than management’s long-term outlook due to expected headwinds in the evolving competitive environment. Shares in Super Retail jumped on the announcement, now trading at just a 7% discount to our intrinsic assessment.