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Morningstar | Super Retail Group's Mixed Interim and CEO's Early Departure Don't Move Our AUD 7.50 FVE

We maintain our AUD 7.50 fair value estimate for no-moat-rated Super Retail Group. A mixed first-half performance across the three business segments leaves our estimates virtually unchanged. Super Retail is currently trading 5% above our intrinsic value. The company reported sales and operating profits for the half, with the outstanding accounts due Feb. 14.

First-half sales growth in the highest-margin auto segment fell short of our previous estimate but was offset by stronger-than-forecast sales in outdoor and sporting. In the second half, we expect consumer spending to remain constrained by relatively sluggish wage growth, a weakening housing market, particularly in New South Wales and Victoria, and uncertainty around the upcoming federal election. We expect these headwinds to affect all three businesses and maintain our estimate for 5.4% full-year revenue growth versus 6.0% reported for the first half. Outdoor sales were bolstered by a full contribution from Macpac, but the second half will partially cycle the sales contributions from the acquisition, which closed March 31, 2018.

Super Retail sells products amenable to e-commerce, particularly sporting goods. Online sales across all three business segments grew more than like-for-like brick-and-mortar sales, and e-commerce generated 11%, 7%, and 6% of sales in sports, outdoor, and auto, respectively. However, online competition is fierce, where price is the main differentiator in addition to range and convenience. We expect strong competition from online retailers to stay and weigh on Super Retail’s EBIT margins.

Unrelated to the trading update, a review of Super Retail’s employee arrangements discovered retail managers had been underpaid by some AUD 32 million over the past six years. We expect the company to incur AUD 30 million in associated costs in the first half, after tax. Triggered by this event, long-serving CEO Peter Birtles will hand over the baton a month earlier than previously envisioned.

Anthony Heraghty, currently managing director of the outdoor segment, will succeed Birtles on Feb. 20. Super Retail’s strong focus on its online capabilities is sound, and we anticipate new leadership will continue investing in e-commerce.

The auto segment represented 42% of group EBIT from operations and delivered like-for-like sales growth of 1.8% in the first half, tracking below our prior full-year estimate of 4.2%. Year-to-date divisional same-store sales growth was slightly better at 2.2%. As such, we lower our fiscal 2019 like-for-like sales growth forecast to 2.2% but maintain our average sales growth forecast at 4.0% over the next 10 years. The segment’s EBIT margin was flat with the previous first half, mainly due to increased depreciation and amortisation costs related to the investments made in its online capabilities. We forecast EBIT margins in the auto segment to remain at around current levels of 11.6% for fiscal 2019.

Sporting goods accounts for 40% of EBIT and delivered like-for-like sales growth of 3.2%, above our previous full-year forecast of 2.5%, driven by transaction growth and an increase in units per transaction. We’ve lifted our like-for-like sales growth to 4.3% for the full year. However, we continue to forecast medium- to long-term sales growth to be challenged by ongoing fierce competition from new entrants JD Sports and Decathlon as well as online players. We maintain our average like-for-like sales growth forecast of 2.3% from fiscal 2020. Following the rebranding and integration of Amart Sports, synergies from the one-brand strategy improved Rebel’s EBIT margins by 10 basis points, with higher depreciation due to investments in online offsetting the impact. We expect EBIT margins to average 9.4% in fiscal 2019, relatively flat year on year, but gradually decline to 8% longer term.

Outdoor’s strong revenue growth of 16.5% was driven by the Macpac acquisition. The core BCF outdoor chain increased total sales by 2.2% and gained market share, with competitor Kathmandu reporting same-store sales of negative 0.2% in Australia for the 22 weeks ending Dec. 30. However, market share gains were achieved at the cost of lower prices, with EBIT margins falling 180 basis points and EBIT down 23% to AUD 15 million. We expect EBIT margins in the outdoor segment, including Macpac, to recover by 70 basis points by fiscal 2020 and stabilise at 6.7% longer term.