Inflation is persisting for retail companies, supporting sales growth, and inventory concerns have eased compared to last year. But wages and rental costs are rising. Super Retail Group FY23 consensus earnings forecasts show an improvement on last year, particularly on gross margin and cash flow. After recent share price weakness, we now neutralise our recommendation to Hold.
Sales growth for SUL is likely to have been resilient in 2H23, supported by strong pricing thanks to inflation. We think the Super Cheap Auto division will demonstrate this best with the outdoor leisure brand BCF the weakest of SUL’s divisions. With freight and logistics costs falling, gross margin should also be robust.
We expect wage increases will be the offsetting factor that will have a dampening effect on group EBIT.
A key factor we are expecting to see significant improvement is inventory. Last year, many retailers were fearful of supply chain issues causing stock shortages in store. SUL built its inventory to negate the impact, but we anticipate this to have normalised in FY23. The company is likely to be generating strong cash flow now and we think this could provide the Board with an opportunity for capital management. We think a special dividend is possible that could see the net yield above 9%.
Investment View
Retailers have generally performed poorly this year relative to the broader market, but we think the consensus view of the sales profile is too harsh. Together with a good cash flow profile, we see the possibility that SUL’s earnings are reasonably resilient when it reports on 17 August. This could provide the opportunity for a special dividend, in our view.
Consumers remain under pressure from higher interest rates and confidence is low. But SUL and others will still capture the residual inflation boost in sales to help offset rising costs.
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 upgraded our recommendation to Hold from Sell.
