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Morningstar | Premier Investments' Long-Term Outlook Unfazed by Near-Term Weakness; FVE Unchanged at AUD 14.50

The share price of no-moat-rated Premier Investments is down some 27% from recent highs of around AUD 20 in September 2018. The shares are now trading at our unchanged AUD 14.50 fair value estimate but don’t offer a margin of safety at these levels.

Premier faces significant short-term headwinds. Brexit uncertainties have been weighing on retail spending in Smiggle’s largest market, while at home in Australia all of the company’s brands are exposed to increasingly pessimistic consumer sentiment, driven by sluggish wage growth and a slowing housing market. Some competing Australian retailers have already reported soft trading conditions over the key fiscal 2019 Christmas period. David Jones said its performance weakened in line with the broader retail market in the final weeks before Christmas. Similarly, Wesfarmers’ Kmart saw sales growth nearly stalled in the first half of fiscal 2019 after consecutive years of strong performance. The discount department store called out weaker sales in apparel sales, especially in womenswear, as a key culprit. We expect the positive momentum Premier’s apparel brands exhibited in the final quarter of fiscal 2018 slowed in the first half of 2019. For fiscal 2019, we maintain our forecast of a 2% decline in core apparel brand sales. However, we are more optimistic on Smiggle and Peter Alexander’s prospects in fiscal 2019 and forecast sales growth of 23% and 18%, respectively.

Despite the muted near-term outlook for Premier, our investment thesis and long-term forecast stand. We expect Premier’s growth brands, first and foremost Smiggle but also Peter Alexander, to continue growing over the next decade. For Smiggle, we forecast sales to increase at a compound annual growth rate of 17% over the period. Smiggle more than offsets dwindling sales at the five core apparel brands: Dotti, Portmans, Jacqui E, Just Jeans, and Jay Jays.

We estimate aggregate sales of these five brands to decline at a CAGR of 2% but Premier’s total retail sales to still grow at an annual rate of 8%.

Complementing Smiggle’s long runway of store openings is Premier’s online platform. Management is fully aware of the changing shopping habits of its customers and invested heavily in its e-commerce capabilities in fiscal 2018. Online sales grew over 60% in fiscal 2018 and reached the company’s 2020 target of AUD 100 million two years early. Amongst its Australian-listed peers, the company generates a relatively high proportion of its sales online. Premier’s online penetration was 10% in fiscal 2018 compared with 8% at Myer, 5% at JB Hi-Fi Australia, and 3% at Harvey Norman.

Corresponding with the growth in e-commerce, Premier is rationalising its store footprint by closing unprofitable stores. We view a reduction in store count of the five mature core brands as an unavoidable result from customers switching to online shopping. We forecast Australian e-commerce sales to growth at an average rate of 12% per year over the next decade, partially fuelled by the recent entry of Amazon Australia. By 2028, we estimate online sales will account for 17% of Australian retail spending versus 8% in 2018. Over the next decade, we expect the physical footprint of Premier’s core brands to gradually shrink by more than net 10 stores per year, from 768 stores in fiscal 2018.