Premier Investments: Sales Slowdown Less Than Feared, but Cyclical Slowdown Likely To Drag On

We increase our fair value estimate for no-moat Premier Investments PMV by 3% to AUD 19.50 per share. The discretionary retailer’s fiscal 2023 earnings guidance was materially ahead of our prior expectations, with stronger retailing sales and EBIT margins in its second half. Fiscal 2023 underlying operating earnings from retailing beat our estimate by 24%, but our investment thesis stands.

Despite comfortably beating our expectations, sales momentum weakened significantly in the second half. Versus our forecast of a 14% decline, group sales were virtually flat compared with the previous corresponding period. However, this is down from 18% sales growth in the first half of fiscal 2023, and also softer than the 8% increase in the first six weeks of the second half—implying average sales declined slightly in the last 20 weeks of the second half. We remain bearish on Premier’s medium-term earnings outlook and anticipate Australian consumers to cut back even more and on shopping at fashion and department stores. We forecast sales to decline by 4% in fiscal 2024, before gradually recovering to maintainable sales growth of 4% by fiscal 2026.

Operating profit margins were also better than we had anticipated in the second half, with operating deleverage featuring less. We were expecting a decline in operating margins of around 180 basis points, but the decrease was much less pronounced, with margins tightening by only about 70 basis points.

With demand waning, we anticipate apparel retailers will increase discounting to move seasonal stock, hurting the industry’s gross profit margins. We estimate Premier’s margins to gradually tighten to 17% by fiscal 2025, but expect these levels to be maintainable in the longer term. Following successful rent negotiations in recent years, we forecast the improved rent cost structure and a greater share of more profitable e-commerce to support higher margins than the 13% achieved before the pandemic.