Super Retail Group is feeling the benefit of having ‘fortified’ its inventory earlier this year. The inevitable post-COVID sales normalisation is happening, but SUL’s brands are still producing good sales growth.
SUL released its sales results for 43 weeks of FY22f so far which showed group sales on a like-for-like basis are -1.3% compared to FY21 but up 24.7% compared to FY20.
Sales trends over the last 16 weeks have been good with Supercheap Auto the standout amongst the portfolio. Supercheap Auto accounts for 38% of group sales and 47% of group earnings, so LFL sales growth of 8.4% for weeks 27-43 (excluding Boxing Day) was impressive. This was closely followed by outdoor leisure specialists, BCF with LFL sales growth of 7.6% for the same period.
Rebel sales growth went backwards by -1.8% in weeks 27-43 as inventory shortages impacted sales.
Macpac, which has a heavy emphasis on winter clothing, is anticipating strong sales growth now that travel restrictions have been removed. At 5% of group sales, Macpac has been badly affected by the events of the last two years.
SUL said gross margins were broadly in line with 1H22 suggesting the company’s elevated inventory position at the end of 1H22 was not a source of margin pressure.
As LFL sales growth is positive and inventory shortages are more likely over the next six months due to disruptions in China, the outlook for gross margins is also good. If sales do turn negative over the next year, the supply-demand balance is likely to lead to less discounting activity.
SUL has turned its attention back to store refurbishments and a change in focus for stores to act as hubs for online sales which are now at 23% of group sales. About 90% of sales involve a store visit including 13% using ‘click and collect’. The overall mix of online sales is 42% home delivery with the rest click and collect.
The company has ambitions to grow its store network by 2026. Supercheap Auto stores could increase to 360 (from 329 1H22), Rebel 157 (154), BCF 165 (145) and Macpac 105 (82). We think this is a bit optimistic and will depend on the medium term sales outlook for each brand and the appeal of rental deals.
The group loyalty program is another fertile ground for sales growth. With 8.7 million group members, the average loyalty member spends 1.4x as much as a regular customer. Active club members are very engaged with each brand as evidenced by net promoter scores in the mid to high 60s.
Sales from active club members constitutes the majority of sales ranging from 57% at Supercheap Auto to 86% at BCF.
Investment view
This trading update demonstrates the resilience of demand with consistent sales growth in recent weeks. Compared to two years ago, in the early days of the pandemic, the sales trends are almost identical.
SUL is trading on a PE ratio of just 10x FY22f eps which is rather cheap, in our view. The company is the number one operator in each of its segments. Its current inventory levels puts the company in a strong position if disruptions from China place further pressure across the industry.
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.
