Super Retail Earnings: Better Finish to the Year, but Business Is Slowing

We increase our fair value estimate for no-moat Super Retail SUL 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.

We remain bearish on the medium-term earnings outlook. We expect sales momentum to continue weakening in fiscal 2024, as shoppers curtail their discretionary spending. We expect demand relative to total retail spending to normalize to prepandemic trend levels, particularly for sporting and outdoor leisure goods. These two categories accounted for just over half of earnings from operations in fiscal 2023.

At current prices, shares screen as significantly overvalued. Sales momentum is deteriorating and we forecast further weakening in trading conditions for Australian discretionary retailers. We think the market is underestimating the risk of soft like-for-like sales and rising costs diminishing operating profit margins.

Super Retail’s sales growth is moderating in calendar 2023, albeit more gradually than we had originally anticipated. We calculate total sales grew by 4% in the second half, down from 15% in the first half of fiscal 2023. In the first six weeks of fiscal 2024, total sales were up merely 2%. For the full year, we expect sales to decline by 6%.