A rugged sales performance from Super Retail Group has been overshadowed by concerns on inventory levels and rising costs. These fears are logical but unwarranted, in our view.
SUL’s FY22 result included a 53rd week. On an adjusted 52 week basis, group sales increased 1.0% while EBIT fell 18% to $396.6 million. Underlying EBIT of $392 million was 8-9% ahead of consensus as gross margins held up, offset by elevated operating costs.
The most significant cost within the business is staffing. It represents about 55% of the total operating cost base and has expanded as the company adds capability for its data and digital offering. Digital investment costs have added to the issue and as online sales grow, so does the fulfilment cost. Some of these additional costs will eventually fall away and be replaced by revenue and gross margin gains.
Group online sales reached $601 million in FY22 representing 17% of total group sales. More than half of online sales are ‘click and collect’.
The higher FY22 inventory of $800 million has created some concern. This figure is $110 million lower than 1H22 but the extra trading week may have clouded the picture. The net inventory position (deducting payables) of $349 million in FY22 was higher than FY21 at $134 million. Most of the inventory is in Supercheap Auto where product obsolescence risk is low. This heightened inventory is seen by management as a four week buffer given uncertainty in supply chains domestically and overseas.
The first 6 weeks of FY23f have begun in hearty fashion. Group like-for-like sales have increased 17% and are all four brands have contributed. The prior comparable period was impacted by COVID-19 lockdowns, so the cheery sales growth is not indicative of how the year will pan out. A more instructive view is to observe a four-year CAGR by brand. This shows SCA has achieved growth of 8% pa, in line with its 2H22 performance. Rebel’s 4-year CAGR is 7.3% against the 13% growth in the new trading year so far. BCF’s jump start to FY23 of 17% is also in line with its 4-year CAGR of 16.3%. The smaller Macpac brand has sprinted out to a 42% growth rate in early FY23 thanks to some cold and wet weather. Its 4-year CAGR is 17.3% but this is due to the brand ramping up in Australia, helped along by sustained domestic travel.
Investment view
The first six weeks of FY23f have extended the strong sales run. Supercheap sales are up 15%, BCF +17% and Macpac +42% compared to the same period last year. On a three year comparison, these are very good results and an acceleration on 2H22 trends.
The company is taking the opportunity to lift investment spending on data and loyalty initiatives by $12 million. SUL’s 9.2 million active Club Members on average spend 1.4x as much as a casual customer. Overheads will $44 million, well ahead of consensus thinking.
The share price has performed strongly since its low in mid-June. We think the impending fall in sales over calendar 2023 may take the wind out of its sails and we now lower our recommendation to Hold.
Risks to investment view
Sales volatility and online competition could cause SUL’s earnings to fluctuate if demand altered or consumer discretionary spend fell.
Recommendation
We have reduced our recommendation to Hold (from Buy).
FIGURE 1: FY22 RESULT
FIGURE 2: INVENTORY TO SALES
FIGURE 3: GROSS MARGIN AND CODB
FIGURE 4: STAFF COSTS
FIGURE 5: ONLINE SALES
