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At Super Retail Group, sales keep on rising

2410219_SUL

At Super Retail Group, sales keep on rising

Super Retail Group (ASX:SUL) is one of Australia’s best-performing listed retailers.  And that was borne out again in its latest trading update, which revealed growing sales across all its franchises. However, margins are starting to come under pressure as the business seeks to grow market share.

SUL houses the BCF, Rebel, Macpac and Supercheap Auto brands. Fifteen weeks into the new financial year, the trading update by new CEO Anthony Heraghty may have provided some insights into retail conditions.

At Rebel Sport, sales were up 3.9 per cent and Like-for-Like (LFLs) were up 3.1 per cent. The LFLs showed an improvement on the 2.4 per cent growth revealed in the first six weeks of the year, implying an acceleration of like-for-like sales.

BCF sales were 6.7 per cent higher and LFLs were up 6.5 per cent. LFLs were better than the 5 per cent growth recorded in the first six weeks, implying an even stronger more-recent 10-week period.

Over at camping outfitter Macpac, sales were 3.8 per cent higher and LFLs 2.1 per cent lower. LFLs, while still going backwards, improved on the minus 3 per cent growth in the first 6 weeks. The company also pointed out that it was cycling very strong numbers in the previous corresponding period.

Supercheap Auto sales were up 3.5 per cent and LFLs sales were 2.7 per cent higher. The like-for-like number however was lower than the 3 per cent growth achieved in the first six weeks.

While top line (sales) growth was quoted as being “solid” the fact is profits equal sales multiplied by margins. With the company recognising weaker retail conditions and keen not to surrender volume to competitors, it engaged in more aggressive promotional activity (cut prices and margins).

Understandably the market reacted negatively to the drop-in margins even though it’s the Christmas period that really matters. If the company has spent its growth on margins, then the overall impact on margins may not be as negative as the market reaction suggests.  Nevertheless, if the consumer is nervous about what low interest rates imply about the economy and are diverting more funds to paying down mortgages, analysts might be unduly optimistic pinning their hopes on a solid Christmas and keep in mind that Anthony Heraghty repeated his intention to maintain the current strategy; “there will be no major deviations from the current course and that the Group will be looking to build on the strategic pillars outlined in May”.

Investors can expect some clarity about margins to be provided at the 8 November investor day.

With SUL trading on a P/E of less than 12 times, some analysts are suggesting the shares could be a bargain. Investors should also consider the impact this year of the company’s Enterprise Bargaining Agreement, and a normalisation of tax rates, on margins. Investors should also keep a close eye on retail sales indicators to determine if and when low interest rates produce an upswing in retail spending.  Keep in mind the RBA’s first cut was in May and, thus far, benefits appear to have been directed into maintaining mortgage repayments.

The Montgomery Small Companies Fund and Montgomery Alpha Plus Fund owns shares in Super Retail Group. This article was prepared 24 October with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Super Retail Group you should seek financial advice.

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Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. Roger,
    I don’t know if you still follow The Reject Shop (TRS), but it recently went below the original float price of $2.
    It’s early days in their recovery, but it appears from comments at their latest AGM that they are finally getting back to what should be their core focus – discount variety retail.
    You pointed out in your book (quite correctly) that it had been a good investment in those early years under Barry Saunders, it shows how important a good CEO is for a retail business.
    Tom

    • Barry is a retailing legend. Under his watchful eye the shares we purchased at around $2.40 soared eventually to $14.00. You could be right and it might be worth having another look. It would be good to hear a comprehensive explanation from current management about what went wrong in the past – for obvious reasons.

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