De-tuning
TRADING UPDATE
Need To Know
- 2H23 gross margins are 10bp below 1H23
- Competitor discounting is rife in camping and outdoor
- Wages, rent and energy still troublesome
The slowing sales trends evident in Super Retail Group’s trading update should surprise no-one. The current environment has been all about inflation driven sales growth which is beginning to dissipate.
A slowing trend in sales growth will be exacerbated by a fall in gross margins. SUL indicated a 10bp drop in 2H23 gross margin which will accumulate to an estimated 80bp gross margin fall across the year, after the company reported a 40bp drop in 1H23.
Operating cost pressures remain with wages, rent and energy costs pestering margins and this will be a feature heading into FY24f. Freight costs have eased.
Like-for-like sales growth (Figure 1) has quietened down compared to the 1H23 outcomes across each brand. Basketball and football sales have helped rebel sales, while auto maintenance and lubricants are pointing to more DIY mechanical activity.
SUL will host a Strategy Day on 17 May at which we hope to learn more about store network growth, a new DC in Victoria and further investment in loyalty data and programs. SUL may need to lift spend on its IT to improve merchandising and gross margin outcomes.
All these areas require capex which investors will weigh up against shareholders’ desire for capital management.
Investment View
The downturn in retail sales is just getting started, in our view. SUL’s trading update indicates a slower sales trend and tighter margins. As inflation unwinds in Australia over the next 12 months or more, sales growth will be impacted. Mitigating any decline for SUL may be its strong position in auto and sports categories.
The company has an eye on network expansion, but this must be weighed against shareholder expectation of capital management. A larger dividend is possible or even a special dividend at the final result in August, but we think the elevated capex might rule a buyback.
Figure 1: SALES TRADING UPDATE
Stock Overview
Share Price
Company Overview
Super Retail Group encompasses the Supercheap Auto, Rebel, BCF, and Macpac retail brands.
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