Despite the company’s protestations throughout the pandemic, Premier Investments is doing very nicely. First half results show lockdowns affected sales, but gross margins are improving.
PMV’s 1H22 result was well flagged, so surprises were few. Of interest was the 54bp increase in gross margins which are now 334bp above pre COVID levels. This has primarily been driven by reduced discounting and we think 2H22 gross margins will be flat. Over the medium term, some discounting will inevitably return as industrywide inventory levels rise.
PMV’s rent costs are likely to rise as rent abatements cease. Underlying rent as a percentage of store sales was 16.6% in 1H22, down from 18.3% in 1H20. PMV is still haggling with its landlords to try and reset rents lower, pointing to the changing shopping habits of customers preferring online to in-store. We estimate PMV has achieved an on-going rent saving of about $25 million pa compared to pre COVID levels.
Even though PMV has vociferously lambasted the performance of MYR over a long period, it has nonetheless increased its stake to just below the 20% takeover threshold. A hypothetical acquisition of the remaining shares in MYR (fully debt funded at 65cps, say) would be highly EPS accretive to PMV. But the company can afford to extend its patience as MYR struggles through its very large and long-dated lease expiry profile. In contrast, PMV’s rental expiry profile is exceedingly short with some 75% of leases in ‘holdover’ (month to month) or with leases expiring in less than 12 months. PMV’s 19.88% stake in MYR is worth $89.8 million at current market value.
Another avenue of potential growth is the expansion of Peter Alexander. PMV could add more stores domestically and make them larger to capitalise on the excellent growth of this unique brand. Compound annual sales growth at Peter Alexander has been 18.3% pa over the last 8 years as store numbers more than doubled to 140 in Australia and New Zealand.
Investment view
We have a positive view on PMV’s sales growth profile over the next two years and expect profit margins to benefit from lower rents and less discounting in the medium term.
The company has expansion potential and has the financial capacity to fund it, but PMV has shown great patience so far. A move to deploy its balance sheet could be a catalyst for the share price, but at the current PE ratio of 19x FY23f consensus EPS, we think the company is fairly valued.
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 have retained our Hold recommendation.
