Premier Investments is an enigma within the retail world. Its brands are very well known and liked in Australia, but the corporate end of the business is cantankerous and judgmental. The company has a portfolio of brands that are mostly mature, but Smiggle and Peter Alexander are capable of growth. Tucked away in the balance sheet are stakes in Myer and Breville Group which are polar opposites in terms of performance.
Much of PMV’s growth in recent years has been courtesy of the spectacular growth in the catchy youth stationery business, Smiggle. The Australian store base of 129 (and 23 in NZ) in 2016 provided the confidence for a big expansion into the UK, Singapore, Hong Kong and Malaysia.
After a robust and rapid start, the UK effort was curtailed by COVID- 19 as UK schools were shut down, scuppering Smiggle’s most important (back to-school) market. The global store network roll-out has been momentarily stifled but we expect it to recover together with new initiatives in wholesale and an interesting merchandising deal with Disney.
The total store base is currently 306 (146 ANZ, 121 UK, 38 Asia) but we expect further growth from Smiggle in the future. PMV’s other star brand is pyjama specialist, Peter Alexander which benefited strongly from the pandemic with sales growth of 34.7% in FY21. The 140 store network is solely based in ANZ but could have appeal in other markets such as the UK.
PMV’s apparel group consists of several mature brands – Just Jeans, Jay Jays, Portmans, Dotti, Jacqui-E – which collectively contribute approximately 58% of group retail sales. Just Jeans has experienced the best annual sales growth rate of 6.1% pa over the last 8 years, but the others have barely troubled the scorer with growth rates ranging from 0.4% to 3.5% pa over the same period on largely static store numbers.
As with many retailers, growth in online sales has been essential to offset declines in bricks and mortar sales. PMV’s online sales are approaching 25% of group sales but the company lacks a comprehensive loyalty program that could enhance growth further.
One area that PMV appears to skimp on is marketing where it spends just 1.3% of sales on this aspect. Store rental costs have been a crusade for PMV. The company argues vigorously against landlords that have for too long (in PMV’s view) got away with annual rent increases regardless of market conditions.
The pandemic gifted a substantial amount of rent relief from landlords, but excluding this benefit to PMV, we estimate its underlying rent to sales ratio was around 18% based on FY19 data. However, as PMV directs its online sales to its DC, the true store rental cost was more like 20% in FY19 and 16.8% in FY21.
PMV has in the past threatened to shut stores across its portfolio if ‘suitable’ (undefined by PMV) rental agreements could not be reached. PMV has decided to shut 4 stores in the Pitt St Mall in Sydney (1 each PA, Smiggle, Portmans and 1x Just Jeans no later than July 2023) citing the landlord’s unrealistic rent expectations, according to PMV.
Breville Group (26.7%)
Brewing quietly in the background is PMV’s 26.7% stake in listed coffee appliance maker Breville Group. BRG has delivered an impressive performance over the last decade developing its coffee machinery (and other appliances – juicers, bluicers, food mixers etc) into high quality products that have successfully sold in Europe and the USA as well as ANZ. Across the last three years when the pandemic has been prominent, BRG’s group sales have increased by 22.5% pa each year while group EBIT increased 16.2% pa over the same period. PMV has said very little about its intentions over this very successful investment which has now reached over $1 billion at market value or approximately 25% of PMV’s enterprise value.
Project Myer (19.9%)
PMV recently increased its stake in MYR to 19.88% and has long been a vocal critic of successive Board and Management strategies and execution. The performance of MYR since it listed in November 2009 with a market capitalisation of $2.3 billion ($4.10 per share) has been singularly dreadful with a current market capitalisation of $418 million. PMV’s Chairman Solomon Lew has been justified in the many barbs thrown at MYR’s Board. But with plenty of balance sheet firepower, PMV has not taken matters into its own hands by acquiring a controlling stake in MYR.
We posit that fixing MYR might be a perfect job for former PMV CEO Mark McInnes who previously ran David Jones when both department stores were in a much better state than today. If not McInnes, PMV could surely find someone appropriate to undertake a project that would follow Mr Lew’s advice and justify his obstinate position. We note that MYR is still looking to appoint a full time replacement for the recently departed MYR chairman Garry Hounsell after sustained pressure from Mr Lew.
Leaving aside the temporary issues posed by COVID-19, the long term problems at MYR are many including a very large lease liability of almost $1.8 billion (36 stores with lease expiry profile >8+ years). MYR has ceded market share and sales to new global entrants (Zara, Uniqlo and others) and struggled to improve its gross margin and cost of doing business.
On the plus side, MYR has lifted its online sales penetration to 28% of group sales, sustained and grown a large customer loyalty program from which it sources most of its sales, improved the balance sheet to a net cash position of $217 million and further reduced its floor selling space among other improvements.
Investment view
Newish CEO Richard Murray has earned his reputation at JB Hi-Fi but the switch to fashion retail under the active gaze of his chairman will be challenging. His predecessor left a legacy of strong growth, particularly at Smiggle, but post-pandemic retailing is a new game, especially as consumers face rising inflation and interest rates.
PMV has a strong balance sheet that could accommodate an acquisition of reasonable size, but the chairman has been keener to agitate from the sidelines. Perhaps the increased MYR stake is a sign of a more active approach.
We think the market is fairly pricing PMV at a PE ratio of 18x FY22f eps.
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 initiated our coverage with a Hold recommendation.
