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Morningstar | Premier Investments Details Approach to Tackling Mainland Europe Markets; AUD 14.50 FVE Unchanged

No-moat-rated Premier Investments’ underlying net profit after tax of AUD 118.1 million in fiscal 2018 was in line with our estimate of AUD 118.4 million. Weaker-than-expected second-half sales in the key Smiggle brand, owing to fallout from the upcoming Brexit, were offset by very strong performance in the mature apparel core brands, although discounting in an intensely competitive market weighed on gross margins of these sales. We maintain our long-term view that strong sales growth in the Smiggle and Peter Alexander brands is likely to be slightly offset by declining core brand sales in Australia, and we retain our AUD 14.50 fair value estimate. Our cautious outlook on the Australian apparel market was also reflected in the board’s decision to impair the casualwear brand names by AUD 30 million. Shares are currently screening as overvalued, with Smiggle’s exceptional overseas growth trajectory more than baked in.

Management provided more detail on the impending entry of the highly successful Smiggle brand into continental Europe, which is expected to be spearheaded by a capital-light concession model initially, with stand-alone infill stores to potentially follow later. In the context of the ongoing migration of consumers to e-commerce, we welcome this strategy to enter new markets via the online and concession channels and avoid rolling out store networks with long leases. Premier’s own online success highlights the dominance of e-commerce over incremental sales growth. Online sales grew by 65% to AUD 113 million in fiscal 2018, and online penetration stands at 10% of Premier’s sales. This is an increase in online sales of AUD 44 million year-on-year, representing exactly half of group total incremental sales of AUD 90 million, despite Premier opening a record 84 new stores. The headwinds facing Premier's physical stores from a general falling footfall have also prompted management to reiterate its stance against current market rents and rent hikes.

Total group sales of AUD 1.18 billion were 1% higher than our AUD 1.17 billion estimate. We had expected sales in the five core brands, still representing 57% of total sales, to decline by 2% in full-year fiscal 2018, yet they increased sales by 1%, with strong sales growth at Portmans and Jacqui E offsetting declining sales in Just Jeans, Jay Jays, and Dotti. The core brands aggregated sales growth of 5.5% in the second half, significantly outperforming the Australian clothing and footwear retailing categories, which grew by 3.5% in the six months to July 2018.

Yet the growth of Smiggle, and to a lesser degree Peter Alexander, are the key focus areas for Premier. Our unchanged sales estimate of about AUD 450 million for Smiggle in fiscal 2020 is in line with the management guidance provided with the full-year result. We forecast Smiggle to increase sales at a CAGR of 17% over the next decade and account for 56% of group sales in fiscal 2028, from 25% currently.

Management confirmed its fiscal 2020 sales target for Peter Alexander of at least AUD 250 million. We are more optimistic and expect the brand to generate close to AUD 300 million in sales in two years, up from AUD 219 million in fiscal 2018.