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Morningstar | Super Retail Group’s Slowing Sales Growth and Leadership Change Don’t Affect Our AUD 7.50 FVE

At its annual general meeting, no-moat-rated Super Retail Group provided a trading update for the first 16 weeks of fiscal 2019. Like-for-like sales in the auto parts, sporting goods, and outdoor segments, grew by 3.1%, 2.4%, and 3.4%, respectively, reflecting a slowdown across all three segments in the last 10 weeks. In the first six weeks of fiscal 2019, they posted like-for-like sales growth of about 5%, 3%, and 4%, respectively. We maintain our full-year like-for-like sales growth estimates of 4.2% for auto parts, 2.5% for sporting goods, and 4.6% for outdoor, as well as our AUD 7.50 fair value estimate.

The board also announced the retirement of long-serving managing director and CEO Peter Birtles. After over 12 years at the helm, he will leave the company in late fiscal 2019, and the board has already commenced a global search for a successor. The current corporate strategy is sound, especially the strong focus on online capabilities, and we don’t expect significant strategic changes under new leadership. He has cautioned weakening consumer sentiment heightens the importance of optimising the balance between sales growth and gross profit margins. We forecast total group sales to increase by 5.1% and group operating margins to increase slightly by 10 basis points to 8.6% in fiscal 2019. The cautious commentary, together with slowing sales growth and leadership uncertainty saw the share price drop by some 10%. However, at current prices, Super Retail Group continues to screen as overvalued.

Longer term, we forecast Super Retail Group to suffer declining gross profit margins, given about 60% of sales are in the outdoor and sporting goods categories, both facing intense price competition from online.

Generally, we expect retailers with the greatest value-for-money, cheapest and fastest delivery options, and finest service when seeking advice or returning unwanted products, are best placed to compete as sales growth online continues to trump in-store. We expect market-leading brands in their respective categories, such as Supercheap Auto and Rebel Sport, to have the necessary scale to fractionalise the significant capital expenditures associated in maintaining and upgrading online platforms, distribution channels, and supply chains.

Our recent analysis of Amazon AU's edge on delivery as well as its pricing strategy to date, suggests Supercheap Auto is best protected against Amazon's shipping-time focus. The auto parts retailer has the fastest turnaround time on click-and-collect sales at only 30 minutes. Accounting for about half of Super Retail Group's EBIT, the auto parts segment operates in a relatively sheltered category as immediacy is of key importance to customers. By ensuring online orders are ready for collection within an industry-leading time frame, Supercheap Auto builds on its competitive advantage. We expect the segment to maintain EBIT margins around current levels of 12% longer term. Also, we forecast the acquisition of Macpac by Super Retail Group in March 2018, to lift EBIT margins in the outdoor segment near term. However, despite our positive outlook on the company's outdoor and auto parts segments, we expect weaker performance in its sporting goods business. For further detail, please refer to our previous research “Aussie Retail Investors: Don't Be Fooled by Amazon's Slow Start.”