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Super Retail Looks To Regain Ranking

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Although Super Retail shows a 12-month total return that's in the red, down 39%, prior to that it has been a solid performer, delivering 13.7% a year over three years and 13.1% a year over five years.

After living high on the hog for a while, it has been a tough couple of years for retailer Super Retail Group (SUL).

The sports, auto parts and outdoor products retailer mostly had a one-way trip to success after listing in 2004, moving from $1.97 at listing to a peak of $13.92 in November 2013. Super Retail was unharmed even by the GFC, as a program of expansion and store openings continued apace.

But then the bottom fell out.

SUL has been hit by the mining downturn, because it has been making a lot of its sales to cashed-up miners: the company identified falling demand from stores in areas hit by the downturn in mining activity as a major detractor from leisure sales in FY14. It has also been hurt by tepid consumer confidence and perceptions of a tough federal 2014-15 Budget, released in May.

The share price has been cut back this year to as low as $7.33 in October, but it has stabilised to be trading at $7.53.

The Super Retail portfolio comprises eight retail brands, in three divisions, namely Auto, Leisure and Sports. The Auto brands are Supercheap Auto and AutoTrade Direct; in Sports, the brands are Rebel Sport and Amart Sports. The Leisure portfolio consists of the Boating Camping Fishing (BCF) chain, which offers a full range of products related to those activities; the Ray’s Outdoors chain of outdoor entertainment and camping equipment stores; the Workout World fitness equipment chain; and Fishing Camping Outdoors (FCO), the group’s New Zealand outdoor and leisure retail brand.

The business was founded in 1972 as Supercheap Auto, a cheap mail-order car parts retailer, by husband and wife team Reg and Hazel Rowe, in their home north of Brisbane.

In 2003, Supercheap expanded by buying a Perth-based car parts business, Marlows, a deal that gave the company a national footprint. The business moved into camping gear, buying a four-store group in Brisbane called Camp Mart and expanding it into a larger chain under the BCF brand. In 2008 the company bought Goldcross Cycles, and then Ray's Outdoors in 2010.

In October 2011 came the company’s biggest deal, buying Rebel Sports and the smaller Amart Sports from private equity group Archer Capital. Later that year the group was renamed Super Retail to reflect its broader portfolio of businesses. Workout World was picked up in November 2013.

Super Retail first hit problems in January, when it reported a slowdown in sales growth across all divisions in the final two months of 2013, and cut its profit forecast by $10 million. Unaccustomed to being disappointed by this stock, the sharemarket promptly hammered SUL down by as much as 24%.

The interim profit was up 1.7% for the December half, to $61.6 million, short of consensus forecasts, which were expecting a profit of about $63 million after the January trading update. Sales rose by 5.8% to $1.1 billion, but sales growth from existing stores slowed, particularly in the leisure division: only new store openings in this division, and strong like-for-like sales in the Sports division, picked up the slack.

Then, in June, Super Retail gave a third earnings downgrade, saying that the loss of consumer confidence and the warm autumn combined to hit sales and profits in April and May. The company told the ASX that sales had suffered significantly since the Coalition government released the Budget in May, reflecting a significant downturn in consumer confidence in that time – particularly across lower-to-middle-income families, which it said represented its core customers.

When the full-year result came out, group sales grew by 4.6% to $2.11 billion – well short of the 22% sales growth achieved in the previous year – and net profit rose by 5.6%, to $108.4 million. The full-year dividend was lifted by 2 cents, or 5.3%, to 40 cents a share.

The full-year result, by the company’s own admission, was solid, but below expectations. The like-for-like sales growth (stripping out new store openings) was less than 2%. On an underlying basis – excluding a tax benefit of $2.2 million and prior-year restructuring provisions of $11.3 million – profit was actually down by 7%. Underlying operating cash flow was up 11%, to $167 million.

Worse, Super Retail's trading update at the AGM disappointed investors. First-quarter improved, but this appears to have been at the expense of margins. Vehicle and Sports division sales growth in the first 16 weeks of FY15 were up 4% and 3% respectively while Leisure was down 8%.

Although Super Retail shows a 12-month total return that’s in the red, down 39%, prior to that it has been a solid performer, delivering 13.7% a year over three years and 13.1% a year over five years. Chief executive officer Peter Birtles has grown Super Retail's revenue from $525 million to $2.1 billion in the eight years he has been in the top job, and has built a company with three major income streams – sports, car parts and leisure equipment. Birtles says he wants to expand the company's operations in the leisure business, and become one of the top-five retailers in Australia by turnover. The company is working on direct sourcing as much product as it can in Asia, as it tries to bring down its supply-chain costs. Super Retail plans to open up to 30 new stores this financial year and refurbish up to another 80: eventually, it wants to roll out 50 stores a year across all formats.

SUL does look to be attractive value. On analysts’ consensus forecasts, the stock, at $7.31 – down from $12.73 a year ago – is trading on a forecast P/E of 10.3 times earnings, and a fully franked dividend yield of 6.5%. (Analysts expect EPS growth of 36% in the current year, and dividend per share growth of 22%.) On the analysts’ consensus price target of $9.50, SUL is under-valued to the tune of about 23%.

But in the medium term, stocks like Super Retail are hostage to fickle consumer sentiment. It would be watching the monthly Westpac–Melbourne Institute Index of Consumer Sentiment, which plunged this week (December 2014 reading) to the lowest level since 2011. The weekly ANZ/Roy Morgan survey of consumer confidence is not as pessimistic, but is at a four-month low.

This month, we have seen the signs of improved consumer sentiment start to flow into retail sales. Retail sales rose by a stronger-than-expected rise of 0.4% in October, according to the Australian Bureau of Statistics (ABS), the fifth straight month of rises, to be up 5.7% on a year ago. If retail sales defy consumer confidence and actually come in over the Christmas-holiday period better than expected, then Super Retail could prove to have been cheap indeed.

But Leisure is the problem child, and must improve for any perceived value in the stock to be realised. Christmas will be critical for Super Retail, says UBS, which adds that it won’t be until the second half before any signs of Leisure improvement might show. Credit Suisse says the future of Ray's Outdoors and Fishing Camping Outdoors is the company’s most pressing issue. In the broker's view, a strategic review is likely to conclude the businesses should close, with the better stores transferred into BCF.

View More Articles By James Dunn

James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au



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