Premier Investments has emerged from the pandemic relatively unscathed. Strong sales growth, particularly in the second half year, together with capital management activity adds to the appeal. But COVID-boosted sales and margins could begin to normalise.
PMV reported FY22 net profit after tax of $285.2 million, an increase of 4.9% on last year. The Board declared an increased final dividend of 54cps together with a 25cps special dividend (both fully franked) payable on 25 January 2023. PMV announced an on-market buyback of up to $50 million although this may be varied at the company’s discretion.
Sales surge. PMV saw its sales rebound strongly in 2H22 at +10.5% growth. This momentum has continued into the first 7 weeks with sales increasing 46.7% compared to COVID-impacted 1H22. A more sensible comparison shows 7.2% growth in 2H22 on a 3-year compound annual growth rate and this has only moderated to 6.7% in the first 7 weeks of FY23f.
Rent roulette. PMV has doggedly called out its various landlords for their inflexibility during the pandemic on rent abatements or renegotiated terms. The company noticeably trimmed its Apparel store network space in FY22 by closing a number of stores at Just Jeans (5), Portmans (4), Dotti (2), and Jay Jays (3). It is not known if these closures were due to rental standoffs, but the consistent story was one of reduction in space, not expansion in this segment. Peter Alexander (PA) exited its 17 concessions with Myer and closed one store in Australia although we note PA is set to open four new stores before Christmas this year.
At a group level, PMV’s rent expense for the year was $195.4 million on a pre-AASB16 basis (after adjusting for COVID-related rent concessions of $10.5m and other factors) representing 13% of total sales compared to 13.5% in FY21.
PJ party. PA has continued to embed itself as a unique brand across Australia and New Zealand. Nine years ago (FY13), PA sales of $101 million were slightly bigger than Smiggle ($90m) while Apparel Brands dominated the group at $646 million. Today, PA’s sales are the largest individual brand within PMV at $429 million (29% of group sales), comfortably ahead of Smiggle at $261 million and is more than half of Apparel Brands at $808 million (5 brands). PA’s store count has doubled from 51 to 107 but the impressive compound annual sales growth of 17.4% pa over that period suggests the brand has legs. On a sales per store basis, PA has lifted from $1.8 million in FY19 to 3.5 million in FY22.
Back to school. The Smiggle brand depends on children attending school. COVID-19 lockdowns severely affected the brand, including in the UK. With kids now back to school, Smiggle sales are once again thriving, helped along by a growing set of partnerships with Disney, Universal Studios and even the AFL.
EBIT margin expansion. PMV’s EBIT margin in FY19 was 11.5% and this expanded impressively to 23.5% in FY22. The majority of the increase came from higher sales with gross margin improvement adding to the lift. PMV’s frugal and aggressive approach to rent also helped but the mix shift has not been a major factor. Online sales increased 14.3% in FY22 to $340 million representing 22.7% of group sales. PMV says its online sales are “significantly’ higher margin than the retail store network, so this factor is also contributing to higher group EBIT margin.
Investment view
The sales glow in early FY23f may eventually fade if consumers succumb to cost of living pressures. The post-COVID sales rally is encouraging but may not be sustainable in the face of rising inflation and waning consumer confidence. We see FY24f as likely to be a more normal year for PMV once the distortions of the COVID period are left behind.
Gravity will eventually take hold of PMV’s EBIT margin too, which we think consensus is yet to acknowledge. Wages and rent will create some of the margin compression which we think will ease back towards 17-18% by FY25f.
The pristine balance sheet is once again a feature of PMV’s management skill. Shareholders have been pampered with a higher dividend as well as a special dividend and PMV will use the modest on-market buyback to massage the share price throughout the year.
PMV’s two investment holdings in Breville Group (BRG) and Myer (MYR) have experienced very different paths. BRG has quietly accumulated a significant stash of value for PMV (25.6%) with its current market valuation of $668 million well ahead of book value at $312 million. Myer, on the other hand, has been a Friday night bar fight for some time now. PMV’s 22.9% stake in MYR is worth $107 million on the market, above the $75.9 million book value. MYR’s operating performance has been so publicly and frequently criticised by PMV that we wonder why it persists with this underperforming investment. In fact, PMV increased its holding by 2.99% just after the financial year end under ASX creep provisions.
Longer term, the Peter Alexander and Smiggle businesses have room for expansion or PMV could even contemplate a move on MYR. Near term, however, a slip in earnings will limit the share price.
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.
FIGURE 1: PMV SALES
FIGURE 2: PMV ONLINE SALES
FIGURE 3: EBIT MARGIN
FIGURE 4: INVENTORY
FIGURE 5: FY22 RESULT
