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Date : 25/03/2021

Super Retail Group

ASX :

SUL

Market Cap : $2.64 Billion

Dividend Per Share : $0.33

Dividend Yield : 4.42 %

Watch

52 Week Range : $3.77 - $12.89

Share Price : $11.87

Super Retail Group has performed remarkably at a time when discretionary income has been pouring into retail. However, we estimate earnings to normalise over the next couple of years. We recommend long-term investors to "Watch".

Company Analysis

Super Retail Group (ASX: SUL) is a private equity type of a firm that operates in the retail industry. Super Retail picks up distressed firms on the cheap, uses their top-notch management to build them up once again and generate cash flows. The retail network extends across Australia and New Zealand with international operations sourcing products and manufacturing from South East Asia and India. Currently, the group operates the below brands:

  • Boating Camping Fishing (BCF) – Super Retail picked up CampMart and its 4 Brisbane stores in 2005. Later that year, the group rebranded it to BCF. BCF sells everything you would need if you were boating, camping, or fishing with thousands of products for experienced or first-time campers. They are essentially a one-stop-shop without direct competitors. BCP has stores all across the country and they are the largest outdoor retailer in Australia.
  • Macpac – Macpac is a New Zealand based outdoor apparel and equipment retailer that has been around since 1973 catering to mountain climbers, hikers, and campers. Super Retail acquired Macpac in April 2018 with a vision to integrate the brand with Ray’s business and grow Macpac into the leading outdoor adventure retail specialist across Australia and New Zealand.
  • Rebel – Rebel is a one-stop-shop for everything sports. Footwear, fitness equipment, sports equipment and accessories for enthusiasts and competitors. They retail several brands under their stores. Super Retail acquired Rebel in November 2011 and not just saved the business but has reinvented it.
  • Supercheap Auto – As the name suggests, they retail auto parts and accessories. In addition to this, they also retail DIY home handyman, travel, touring, outdoor, garage and shed products at cheap prices. Supercheap Auto is the first brand of the Super Retail Group with over 290 stores across the country and over 10,000 different products.

Super Cheap Auto and Rebel are the largest contributors to Super Retail Group. Both brands bring in over a billion dollars in revenues for the group. Even before the retail boom we are in the midst of due to the pandemic, Super Retails brands have shown consistent growth as can be seen in the chart above. In the below table, we can see that over 75% of the revenues are generated by Super Cheap Auto and Rebel. BCF is the next big brand that has also shown sustainable growth over the past 3 years. Macpac on the other hand looks to be holding down the group as far as revenue sustainability is concerned.

Company Updates

Now that we know what Super Retail’s brands do and how they have performed and contributed to the group’s revenues, let’s have a look at how performance has been in the latest half-year, when the retail industry has really taken off with discretionary income from travel allocated to shopping.

Like-for-like sales growth is the determining factor for Super Retail. This metric compares how the products have performed in sales. It excludes factors that could artificially inflate or deflate the revenues – such as new store openings or the company temporarily benefitting from the launch of a new product. Essentially, it measures how organically a company’s products have performed.

  • Total Group sales up 23% to $1.78 billion
  • Group like-for-like sales growth of 24%
  • Online sales up 87% to $237.4million
  • Group segment EBITDA up 95% to $311.4million
  • Group segment EBIT margin up from 6.4% to 14.4%
  • Statutory NPAT up 201% to $172.8 million
  • Underlying NPAT up 139% to $177.1 million
  • Fully franked interim dividend of 33 cents per share

Group online sales increased by 87% to $237.4million, representing 13 per cent of the Group sales. Click & Collect represented 45% of Group online sales. Click & Collect sales increased by 74% to $107.8million while home delivery sales also increased by 100% to $129.6million. The investments made in order to turn Super Retail into an omni-retail platform has benefitted massively as consumer spending shifted to digital channels.

The Group fulfilled over 2 million online orders during the first half and now has 700,000 more active online loyalty club members than in the prior comparative period (pcp).


Source: Super Retail

Super Cheap Auto

Supercheap Auto opened one new store during the first half, with 327 stores at period end. Sales increased by 20.2% to $661.9million, driven by strong like-for-like sales growth and contribution from new stores. Like-for-like sales growth of 19.6% reflected both transaction growth and increased units per sale – driving higher average transaction value. Like-for-like sales growth was achieved in all categories with Outdoors and Accessories delivering the strongest growth. Segment EBITDA increased by 69.1% to $127.7 million, and Segment EBIT increased by 81.7per cent $104.1 million. Online sales grew by 46.1% to $54.2 million.

Rebel

During the period, rebel opened one store and closed four stores. Currently, they have 157 stores in operation. Sales increased by 17.0% to $623.7million. Like-for-like sales growth of 17.1% was driven by transaction growth and higher average transaction value. Like-for-like sales growth was achieved in all categories with Fitness and Hardgoods delivering the strongest growth. Apparel and Footwear sales accelerated during the half as COVID-19 restrictions eased.

Super Retail Group’s limited stock availability impacted sales, but this was offset by higher gross margin due to reduced promotional activity. Segment EBITDA increased by 74% to $119.0 million, and Segment EBIT increased by 85.5% to $99.6 million. Online sales grew by 102.1% to $119.9 million.

BCF

BCF opened 2 new stores during the half year period. They now operate 141 stores. Total sales increased by 50.9% to $427.7 million. Like-for-like sales increased by 50.8% due to increased transactions and higher average transaction value. BCF reported a material uplift in boating, camping, and fishing sales during the period as COVID-19 restrictions eased and domestic tourism and leisure activity increased.

Strong growth in Segment EBITDA and Segment EBIT reflected increased sales intensity driven by unprecedented consumer demand. Segment EBITDA increased by 229% to $72.7 million, and Segment EBIT increased by 412.4% to $62 million. Online sales grew by 113.1% to $50.5 million.

Macpac

Macpac did not open any new stores during the period and they currently have 72 operating stores. Sales fell by 5.3% as a result of a 3.3% decrease in like-for-like sales and store closures and relocations. In New Zealand, like-for-like sales increased by 15.6% despite store closures in Auckland and a downturn in tourism. In Australia, like-for-like sales decreased by 15.3%, reflecting store closures in Melbourne and the impact of offshore travel restrictions on thermal and insulation sales. A decline in thermal and insulation sales was partly offset by strong performance in tents, backpacks and accessories following the successful launch of the summer family camping range. Segment EBIT increased by 52.2% to $3.5million and segment EBIT margin increased by 210 bps to 5.6%. Online sales grew by 93.9% to $12.8million.


Source: Tradingview.com

This strong performance at a turbulent time has taken the stock price to 5-year highs. The orange line in the above chart tracks the broad ASX 200 index, and it is clearly seen that Super Retail has outperformed the benchmark index and then some during this time. It has been a common theme across several retail stocks during the period.

Industry Analysis

All retail industries have been benefited by an increase in disposable income over the last few years. During the pandemic, the JobKeeper program had a massive part to play in the uptick of the retail trends. Motor vehicle numbers are forecasted to go up in Australia once we are out of the pandemic. This will be driven by a strive to increase the population of Australia with liberal immigration policies or through the planned baby boom that has been planned. The reality is that Australia’s population is aging, and a catalyst should be introduced if we are to see sustainable growth in GDP in the coming years.

The Motor Vehicle Parts Retail industry is forecasted to expand over the next 5 years as more vehicles mean more parts requirement. The sale of used cars is also projected to increase during this period to further facilitate the growth projections for parts retailing. Analysts project a 3% annualised increase in revenues to $6.4 billion by 2025-26.

The sports and camping equipment retail have really benefited as Australian were forced to travel domestically. This has increased the need for camping and sports equipment, along with the other factors we mentioned earlier. Sports participation is estimated to increase over the next few years as government policies and campaigns suggest there will be initiatives in place to boost sport and recreational activity. The growth here is projected at a far lower rate. Analysts project a 1.5% annualised growth for the next 5 years and to reach revenues of $4.5 billion.

Investment Thesis

In the last financial year, Super Retail earned $2.8 billion in total revenues. This year, with a record half-year performance, they have already earned $1.7 billion. This significantly increases the potential for full-year revenues in FY2021. However, we expect growth rates to normalise following on and that means we will see a negative growth rate. Maintaining a linear growth rate requires a lot of investments and acquisitions, which is not expected with Super Retail. It looks the market has also taken this into consideration based on the multiples it is trading at.

The uptick in performance in FY2021 has really boosted revenues and EBITDA margins. The strong margins are a result of:

  • Enhanced profitability with an increase in online sales
  • Increase in sales while fixed costs have remained stable
  • Decrease in expenses due to JobKeeper assistance
  • Reduced promotional and marketing expenditure

We are expecting revenues to normalise based on the macro economic factors at play – such as modest industry growth and a partial rebalance of discretionary income allocation once travel restrictions ease. Based on these assumptions, we expect a 6% pullback in revenues for Super Retail. Following on, our estimates suggest that Super Retail will continue growing at an average of 3% year-on-year by increasing the presence of their existing brands by adding new stores and/or increasing marketing spends for online sales. In order to increase revenues substantially, Super Retail will have to acquire companies and add to their brand portfolio – which we have not accounted for in our forecasted data. The decreased growth rates relative to what we witnessed in FY2021 and the increased spending required to continue growing at 3% will result in decreased EBITDA margins. However, it will still be far higher than the margins Super Retail operated with just a year earlier. The reason for maintaining these high margins will be particularly led by increased online sales. Online sales mean less fixed costs as store operations will not be required, and customers are usually charged to compensate for the logistics efforts such as shipping.

Super Retail’s balance sheet in the long-term is extremely strong. Inventory and PPE underpin their asset value.

  • Inventory increased by $19.4m compared to pcp and reflects higher stock in transit (up $43.2m)
  • Higher inventory levels in Supercheap Auto, BCF and Macpac reflect inventory restocking as the brands reposition inventory levels to meet current elevated levels of consumer demand
  • Lower inventory levels in rebel reflect ongoing supply constraints which are expected to ease during the second half of 2020/21
  • Trade payables increase reflects extension of trading terms negotiated with trade partners as well as in increase in inventory purchases driven by higher sales
  • PP&E balances have reduced due to accelerated depreciation and amortisation

Super Retail holds $417 million in cash on their balance sheet. Inventory and other receivables make up its current assets to $1.1 billion. While on the current liabilities side, the majority of the $1.1 billion is made up of accounts payable and the current portion of leases that are payable for the stores. The total debt the group holds is $886 million, and the long-term financial health is very strong with total assets exceeding total liabilities by 1.63x.

The short-term financial health is not very comforting. Current ratio and quick ratio measure the short-term liquidity of a firm. While the current ratio is 1x, the quick ratio is known as the acid test – determining how much of the short-term liability can the liquid assets pay-off. This measure does show a cause for concern under unforeseen circumstances.

The latest cash flows show: Operating cash flow was $420million, $180.9 million higher than the prior comparative period. Total capital expenditure of $29.4million was $8.5million below the prior comparative period and included $19 million spent on omni-retail and IT projects and $10.4 million spent on new stores and refurbishments.

Increase in NPAT has resulted in increased EPS and thus, increased dividends for shareholders. Super Retail maintains a 55% – 65% payout ratio of NPAT. Therefore, based on our earnings estimates, and assuming the Super Retail will not require additional equity funding, the EPS and dividends per share estimates based on a 60% payout ratio are as below:

We estimate the full year dividend for FY2021 to be in around 73 cents a share. Going forward, we do forecast a cut back due to the decrease in performance, however, the dividends are still estimated to be more than double what Super Retail paid out in FY2020.

The valuation multiples based on the current market capitalisation and forward-looking forecasts can be seen in the table below. Super Retail is one of the cheapest retail companies based on the ratios. However, the reason is due to the forecasts in revenues and EBITDA. The forward-looking ratios decrease in FY2021 due to the abnormally high performance, but then increase once again in FY2022. This break in growth estimates is the reason why Super Retail is trading at a far lower P/E or EV/EBITDA ratio compared to the other retail giants that have shown similar positive performances in the half year earnings report.

Risks Consideration

  • The JobKeeper Program’s continuation or discontinuation will result in significant sentiment trading of retail stocks.
  • Super Retail’s brands are mature – leading to stagnant organic growth for the group.
  • Retail spending may decrease once international travel is back in full swing.
  • Management has not provided any guidance.

Recommendation

Super Retail Group has performed remarkably at a time when discretionary income has been pouring into retail. The strong performance is expected to continue throughout FY2021. However, we do estimate revenues and earnings to normalise from the following year. We recommend investors to “Watch” and wait for an entry at a lower price.

 

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