Company Reports

Narrow-moat Super Retail Group delivered a solid fiscal 2024 result in the context of rampant cost inflation and subdued consumer sentiment. Sales increased by 2% on the previous corresponding period, or PCP, driven by store rollouts and strong growth in online sales. While gross margins held up year on year, cost inflation drove down pretax margins by some 150 basis points to 8.8%. Underlying NPAT dropped by 11% to AUD 242 million, just 2% short of our forecast.

Super Retail Group operates in Australia and New Zealand, selling automotive parts and accessories, sporting goods, and outdoor leisure equipment. The group is the market leader in all three segments in Australia, with about 20%-30% market share in auto parts, camping equipment, and sporting goods retailing. However, we believe formidable competition will constrain operating margins as the firm competes on price to maintain market share.

The upcoming August 2024 reporting season will draw the line under a difficult year for Australian retailers in which they navigated soft demand and soaring labor costs. The combination results in a profit margin crunch and declining earnings for many retailers.

We upgraded Super Retail’s moat rating to narrow from no-moat and increased our fair value estimate by 5% to AUD 11 per share. Implicit in a narrow moat is the anticipation of earning economic profits for longer than previously credited. We estimate the group’s returns on invested capital, excluding goodwill, will exceed its weighted average cost of capital for at least the next 10 years. The upgraded moat rating reflects our changed view on the competitive cost advantage of the core Supercheap business, which accounts for about half of group earnings.

Super Retail Group operates in Australia and New Zealand, selling automotive parts and accessories, sporting goods, and outdoor leisure equipment. The group is the market leader in all three segments in Australia, with about 20%-30% market share in auto parts, camping equipment, and sporting goods retailing. However, we believe formidable competition will constrain operating margins as the firm competes on price to maintain market share.

Trading momentum is soft across all of no-moat Super Retail’s brands: Supercheap Auto, Rebel, BCF, and Macpac. In the first 10 months of fiscal 2024, group sales are up 2% on the previous corresponding period. Sales growth is deteriorating in the second half of fiscal 2024, as expected, but tracking ahead of our prior forecast. We marginally upgrade our sales estimates by 2% in fiscal 2024. Gross margin is also holding up better than we had anticipated, flat with the previous corresponding period. We upgrade our fiscal 2024 adjusted earnings per share estimate by 5% to AUD 1.06. However, our long-term estimates are largely unchanged.

Talk of interest rate cuts and impending tax cuts is sparking a rally in consumer cyclicals. We agree these factors improve the near-term outlook for consumer spending, with cyclical retailers more exposed. We expect the combined impact of fiscal and monetary tailwinds to underpin mid-single-digit growth in total retailing sales in the medium term—compared with our estimate of only 2% growth in fiscal 2024. But underlying our near-term forecast is a significant divergence across categories, with sales in cyclicals virtually flat and defensives up 4%.

No-moat Super Retail’s first-half fiscal 2024 sales of AUD 2.0 billion and pretax profit of AUD 204 million were in line with guidance from January 2024. The board declared an interim dividend of AUD 0.32 per share, fully franked, representing a 50% payout ratio.

Super Retail Group operates in Australia and New Zealand, selling automotive parts and accessories, sporting goods, and outdoor leisure equipment.

We maintain our fair value estimate on no-moat Super Retail at AUD 10.50 per share, with shares screening as materially overvalued. This reflects our more cautious view on the group’s profit margin outlook.

E-commerce platforms have been outperforming physical stores recently. Transaction data from National Australia Bank suggests online retail sales in October lifted 10% on last year, while total retail trade was up only 1%, as reported by the Australian Bureau of Statistics.

We raise our fair value estimate for no-moat Super Retail Group by 5% to AUD 10.50 per share, with shares screening as overvalued. The increase in our intrinsic assessment is principally due to better-than-expected performance of discretionary leisure goods retailing, including sporting and camping goods.

We expect only modest discretionary goods sales growth in fiscal 2024, while interest rates stay high and household incomes struggle to keep up with inflation. With demand soft, discounts and promotions abound in discretionary retail, and with wages rising as well, earnings are under pressure. But for some, cost pressures are easing. Steep declines in global food commodity prices bode well for fast-food restaurants. Quick service restaurant operator no-moat Collins Foods and master franchisee narrow-moat Domino’s Pizza screen as undervalued.

We increase our fair value estimate for no-moat Super Retail by 5% to AUD 10 per share, principally due to the time value of money. Fiscal 2023 sales of near AUD 2 billion beat our estimate by 2%. And while we calculate pretax profit margins declined by almost 100 basis points in the second half versus the previous corresponding period, we had expected intensifying competition to weigh more on gross profit margins, as well as greater operating deleverage as the cost of doing business pressures build across the retailing sector. Fiscal 2023 underlying earnings beat our estimate by 9%, but our investment thesis stands.

No-moat Super Retail Group’s preliminary earnings for its first-half fiscal 2023 were significantly stronger than we had expected. The beat was driven by solid sales performance over the key Christmas trading period, as well as profit margins expanding in the first half—instead of our expectation of a moderation in margins. The short-term earnings strength lifts our fair value estimate by 6% to AUD 9.50 per share. Shares in Super Retail trade at a material premium to our intrinsic valuation, which we believe reflects the market’s more positive outlook on consumer demand.

Super Retail Group operates in Australia and New Zealand, selling automotive parts and accessories, sporting goods, and camping, fishing, and boating equipment.

Our prior report included an incorrect fiscal 2019 dividend forecast. Our corrected forecast is AUD 50 cents, representing a 6.7% yield at our fair value estimate.

Shares in no moat-rated Super Retail Group remain overvalued following the company’s trading update for the 43 weeks to April 27, 2019. We maintain our fair value estimate of AUD 7.50. The negative impact of weaker-than-expected sales growth in the core auto and high growth outdoor segments were offset by the positive impact of the time value of money on our fair value estimate. We anticipate Super Retail to struggle to grow EBIT margins over the next decade, with group operating margins hovering around 8.7% over the period. Over the next three years, we expect stiff competition in the commoditised sport goods retailing segment to drive down its EBIT margins to 8% from over 9% currently. The auto segment enjoys some shelter from online competitors, as Supercheap Auto’s physical store network adds value for customers with in-store services. We expect EBIT margins in the auto segment to expand and largely offset the declines in sporting. Further to these competitive headwinds, a new enterprise agreement, or EA, will likely weigh on near-term EBIT margins, especially in fiscal 2020. The proposed EA covers about 10,000 employees and would see store wages inflate by 5.8% in fiscal 2020, and by a further 2.9% in both fiscal 2021 and 2022.

Our AUD 7.50 fair value estimate on no-moat Super Retail Group stands. Cash flows, balance sheet and the P&L down to the EBIT level were released on Feb. 12, 2019. Today, the company followed up with NPAT and dividends for the half-year fiscal 2019.

No-moat-rated Super Retail Group's underlying net profit after tax of AUD 145 million beat our estimate by 6%, largely driven by a stronger outdoor segment. The EBIT contribution from the newly acquired Macpac business even surpassed management’s expectations in the first three months of ownership. The results of the company’s two key segments accounting for almost 90% of group EBIT, auto and sports, were broadly in line with our expectations. Our long-term sales growth and EBIT margin forecasts for the individual segments are substantially unchanged. However, we lift our fair value estimate by 4% to AUD 7.50 per share, reflecting the time value of money.