It is something of a measure of how much retail is on the nose that Macquarie only has a neutral rating on Premier Investments despite praising it for a “very good cost performance.” Macquarie points out that rental growth has been contained and that margin improvement has generally been well executed. But no business cost-cuts its way to success, and the question marks remain over the ability of management to adapt to online competition:
A large part of the group’s future organic growth is expected to come online and from the roll-out of Smiggle and potentially Peter Alexander in Asia. As with any expansion into larger international markets, this opportunity also comes with increased execution risk but in the Singapore launch of Smiggle, PMV appear to have made a very good start. All brands are now online but the initiative is still in its infancy and evolving. An aspirational target of 10% of sales online by 2015 does not appear unrealistic given the focus and investment.
Premier is on a pretty generous forward earnings multiple of 15 times, so it has certainly not been over sold. The dividend yield of 6.5% gives the stock some support, but the challenges that all retailers face remains:
Finally, can the management changes underway rejuvenate the larger mature brands? The Portmans turnaround appears to be gaining traction and while early days for the new management teams the performances of Jay Jays, Jacqui E and Dotti which collectively represent ~45% of sales were disappointing and if not arrested have the potential to offset the benefits of the above initiatives. We expect it may take until 1H13 results to see if the green shoots highlighted in Dotti and Jay Jays take hold.
The stock’s fundamentals seem to offer some downside protection but risks remain.