Strong consumer demand and higher prices are supporting an extended run of good sales growth. But we see a gradual earnings decline over the next two years as sales mellow and cost increases bite.
1Q23 sales does not tell the story. Last year’s lockdowns have turned this year’s first quarter comparable store sales growth figures into an exaggeration of what is nonetheless a strong outcome. Group like-for-like sales growth of 20% for the first 16 weeks of FY23 reflects both the weak period last year and the solid demand so far this year. Online sales as a percentage of total sales has drifted back to 10% of year-to-date sales, compared to 16.9% for FY22.
BCF was the only brand to fall short as higher discounting appears to be the result of more competition from Anaconda. SUL noted on-going sales momentum in camping and apparel gear, but demand for portable fridges has thawed.
The 3-year average growth rates for sales remain in the high single-digits demonstrating the excellent brand range appeal.
The company noted that group gross margin was in-line with last year. We think this may slip if inventory levels rise opening the door to more discounting. The cost of doing business is also under some pressure, particularly for labour. This may cause EBIT margins to pull back to pre-COVID levels around 8.0-8.5%.
Investment View
Our view remains that sales growth will ease over the next two years as consumer demand wanes due to higher interest rates and inflation pressure on household budgets. It also considers the elevated sales over the pandemic period and is not a reflection of the company which maintains a good operational performance. SUL is making fundamental improvements to its promotional activity, store formats and its loyalty programs but the weakening economy is going to temper SUL’s earnings cadence. Consensus earnings for FY23f appear a touch too aggressive, in our view, but directionally it is right.
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 Hold recommendation.
