Even with a good start to the financial year, sales are likely to gradually normalise over FY23. The lower Australian dollar will begin to squeeze gross margins and consumers will become more selective on discretionary spending.
PMV’s trading update shows sales growth of 21.7% for the first 12 weeks of FY23 compared to pre-COVID sales in 1H20. We think this trend can persist at least in 1H23f (cf 1H20) before softening in 2H23f and perhaps a slight fall in FY24f. It is a gentler trajectory than consensus forecasts are suggesting and considers the quite sturdy ABS statistics (Figure 1) showing clothing, footwear and personal accessories sales growth better than other retail categories compared to three years ago.
PMV’s store count has been fairly static in the last few years as the company has battled landlords over rent agreements. At the same time, PMV’s online sales have surged to 22.7% of total sales which the company says is at a significantly higher margin than the store network.
Unusually for PMV, it has not hedged its goods purchases this year when it would normally have ~90% cover. As at 31 July (year-end) PMV effectively had no hedging in place as the Australian dollar has fallen from 77c to around 64c against the USD. That will impact gross margin by about 150bp and is a clear negative factor for earnings this year. PMV notes that a -10% move in the AUD against the USD would result in a $3.9 million reduction in net profit for the year based on its currency exposure at the time.
Investment View
The post-COVID sales pathway is playing out differently across the retail industry. Strong clothing sales is supporting PMV’s trajectory so it could take a little longer to see sales normalise from the elevated levels throughout the pandemic.
With some pressure on gross margins and rising wages and rent, together with slower growth in (high margin) online sales, we could see EBIT margins ease back towards 17-18% by FY25f. With no hedging protection heading into FY23, PMV will not want to be caught with excess inventory, so discounting becomes a potential factor this year.
We think the share price is fairly valued by the market at the current level given the outlook.
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: retail sales sept 2022 – CAGR vs 3 years ago
