The post-pandemic retail hangover has infected most retail company share prices. We postulate that Premier Investments has evaded the worst of the sales slowdown and with a clean balance sheet, is set to outperform its peers.
Consensus earnings forecasts for PMV have been on a downgrade path recently, with the stock now trading at ~13.6x FY23s EPS. At an industry level, retail spending has been under pressure as higher interest rates impinge on discretionary spending. Higher wage claims have bitten into operating margins and the volume of goods being sold is at an ebb. Offsetting this, inflation has softened the sales decline with price rises in most retail categories. Globally, apparel appears to have performed better than other retail categories this year. Consumers have dipped further into savings to sustain spending and lifestyle choices.
The key brands for PMV are Peter Alexander (PA) and Smiggle with the collective Apparel Brands all quite mature. PA sales have passed the pandemic peak, but the company is set on expanding the brand domestically with 20-30 new stores planned and internationally via a partnership. The latter is expected to launch in 1H24. Smiggle sales will have on a smaller footprint of stores but buoyed by a vigorous return to growth post-pandemic.
We expect to see pressure on PMV’s gross profit margin from higher discounting activity and with wages accounting for >24% of sales, this will also impact on EBIT margin.
The inventory position for PMV should prove to be in a better position when the company reports in late September, and this should see working capital in a more normal state.
Where we believe the market has misread PMV is in the FY24 outlook for earnings. Revisions have fallen substantially and the share price has reflected this but we think a resilient consumer, combined with a peaking of interest rate increases and a gradual decline in inflation with reinvigorate PMV’s sales sooner than the market anticipates.
Investment View
PMV has paid consecutive special dividends in its last two results and while we do not anticipate a third, there is certainly scope on the balance sheet to allow it.
PMV is in expansion mode with the plans for Peter Alexander and potentially further footprint growth for Smiggle internationally. The company will have net cash of ~$380m at balance date with which to fund its growth and any capital management.
Additionally, PMV still owns 25.6% of Breville Group (market value $846m) and now owns 22.9% of Myer (market value $122m). PMV has been increasing its ownership of MYR just as the department store business has finally found some earnings growth. We are not speculating on whether PMV would act on either of these investments but simply note they are orbiting the PMV mothership.
Our primary reason for upgrading to a Buy recommendation is the fall in the share price which we now see as undervalued.
Risks to Investment View
Consumer spending may not deliver the sales growth implied and higher interest rates and inflation could also affect earnings.
Recommendation
We upgrade our recommendation from Hold to Buy.
Figure 1: PMV PE Ratio
