In a half of two quarters, Super Retail Group has regathered its sales momentum as the COVID impacts recede.
Group sales of just over $1.7 billion in 1H22 were 4% lower than last year, which itself was a record. But 1H22 did not include Boxing Day (unlike 1H21), and technically falls into 2H22 this year. SUL said if Boxing Day had been included in 1H22, group sales would have been $27 million higher and added $7 million to profit before tax!
Online sales surged again, this time by 64% to $389 million and is now 22.8% of group sales. Click and Collect sales doubled and are 58% of online sales. Online activity has helped to lift Loyalty membership by 22% to 8.7 million customers making the aggregate group scheme one of the country’s largest.
SUL has been reducing its promotional activity and this leads to a higher gross profit margin. This was offset by higher supply chain costs, and bigger costs associated with home delivery.
Operating cost growth of 6% in 1H22 led to margins falling slightly. The company highlighted $21 million of cost growth associated with team costs and new projects in data and digital. These costs will be on-going but the $10 million attributed to COVID-19 will unwind.
SUL increased (company described is as ‘fortified’) its inventory quite substantially during the period, ostensibly to mitigate any supply chain disruptions. Its cash balance has therefore shrunk to $94 million. SUL has no bank debt at the moment. The inventory increase was skewed towards Supercheap Auto which has a high proportion of own label sales, so inventory obsolescence is less concerning. We understand Supercheap Auto has got off the line quickly in 2H22f with LFL sales up 9.3%.
SUL’s most recent trading shows like-for-like group sales growth of 6.0% in the last 6 weeks, even with Omicron suppressing foot traffic, particularly in CBD and shopping mall locations (rebel). At the same time last year, LFL sales had exploded by 30.5%.
Investment view
The main theme for SUL is the normalisation of sales and earnings after the extraordinary COVID-boosted period is now ending. SUL has a good balance sheet, a big loyalty cardholder base and less promotional activity to support earnings from here.
The share price is reflecting a PE ratio of around 13x FY23f consensus forecasts which seems modestly insufficient, in our view.
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 retained our Buy recommendation.
