UBS analysts say Premier Retail cannot maintain elevated sales from FY23E, nor elevated earnings before interest and tax (EBIT), as discretionary spending takes a hit.
Premier Retail owns and operates fashion brands such as Peter Alexander, Just Jeans, Jay Jays, Dotti, Jacqui E and Portmans. It is the retail arm under Solomon Lew’s Premier Investments (PMV).
In a note to clients, the analysts wrote that Premier Retail’s sales growth outlook is “deteriorating”.
“Sales growth was mixed during COVID, with store closures, but many sales shifted online, while PMV brands were well positioned leading into COVID.
“Peter Alexander (PA) was upgraded in the minds of consumers, with range extensions into accessories, kids and plus size key growth drivers,” analysts wrote. “Smiggle growth moderated due to UK store closures and reduced retail and wholesale volumes as many children were not at school.
“Despite mixed performance during COVID, the increasingly challenged environment is expected to weigh on sales due to trade down & purchases being deferred across Premier Retail brands.”
The analysts added that despite mixed sales growth during COVID, PMV’s EBIT margins rose markedly “given promotions were well managed (competitors lacked inventory, buoyant consumer), positive margin mix due to channel shift to online, and most of all the significant restructure of the share of industry value between landlords and retailers.
“Now, promotions are expected to return and FX [foreign exchange] is a headwind, both weighing on gross margins, move back to stores is a negative channel shift, while operating de-leverage plus rising labour and rent costs (but still below FY19) drive CODB/sales higher.”
While PMV performed strongly during COVID despite the challenging market, UBS analysts expect this to unwind as consumers respond to economic pressures with some trade-down to lower-priced brands and reduced overall spending.
“Further, some of the very strong cost management that was a support for significant EBIT margin expansion during COVID is expected to partially unwind as gross margin pressure returns (promotions, FX), CODB rises (rents, labour) and operating de-leverage headwinds occur.
“Despite significant share price decline, we expect further share price moderation despite the potential for capital management (A$50m on-market buyback approved, but none executed since announcement at FY22 result) with UBSe earnings below market.”