Company Overview - Super Retail Group Limited is an Australia-based specialty retailer. The Company operates in three segments, namely, Auto, Leisure and Sports. Auto segment is engaged in retail and distribution of motor vehicle spare parts, tools and equipment. Leisure segment include retail and distribution of boating, camping, fishing, outdoor equipment and apparel. Sports segment is engaged in retail and distribution of sporting equipment, bicycle accessories and apparel. The Company offers products under the following eight brands, namely, Amart Sports, BCF, Avanti Fitness, Goldcross Cycles, FCO Fishing Camping Outdoors, Ray’s Outdoors, Rebel, Supercheap Auto and Workout World. As of July 2014, the Company had 641 stores in Australia and New Zealand.

 

 

• Investing heavily to support its growth in coming years: Super Retail Group Ltd (ASX: SUL) has invested over $90 million for its potential business by opening new stores, developing multi-channel business capabilities  as well as refurbishing its existing stores. The group reported a sales increase by 7.1% yoy to $2.24 billion in fiscal year of 2015, driven by like for like sales improvement across its Auto and Sports division. However, the Group’s Segment EBITDA fell by 3.9% yoy to $231 million during the period, impacted by the leisure division performance as well as rising group costs. Restructuring of the Ray’s Outdoors and Workout World businesses costed $12.8 million while the loss of $16.2 million was incurred related to the discontinued FCO business. Normalized NPAT fell by 5.3% yoy to $106.3 million as SUL incurred costs associated with the restructuring and discontinued businesses. As a result, the earnings per share from continuing operations fell to 49.4 cents in fiscal year of 2015, from 55.1 cents in FY14. But, Super Retail Group maintained its dividends at 40.0 cents per share. The group’s cost of doing business ratio improved on the back of lower LFL sales and multi-channel and group projects.  Depreciation and Amortization cost also increased due to group’s multi-channel investment.

 
 
 
    
 
    Financial Performance over the years (Source: Company Reports)

• Growth from new as well as existing stores drove the Auto Retailing segment:Auto Retailing segment reported a revenue increase by 4.4% yoy to $854.3 million driven by the growth coming from nine new stores, while like for like sales delivered 2.2% on a year over year basis (the results includes Supercheap Auto and Auto Trade Direct). The segment had 300 stores at June 2015 with 29 refurbished stores which comprises 2 Superstores. BCF / Rays club membership reached 3.0 million with 1.4 million active members. Accordingly, SUL is building Rays Outdoors offer to meet the needs of the target customer groups – the ‘Traditionalist’, the ‘Socialiser’, the ‘Progressive’. Gross margins rose by 0.2% to 44.7% during the FY15, boosted by the pricing and promotional management, trading terms, overseas sourcing, own brand development. Cost of doing business was enhanced during the period on the back of cost of new store openings which was partly offset by efficiencies in marketing and general cost saving initiatives. Meanwhile, SUL is targeting inventory turns of 3x and intends to achieve up to 30% of the range being private and exclusive brands.

 
          
 
         Auto Retailing segment Performance (Source: Company Reports)

• Revived performance in BCF for leisure retailing segment: Leisure retailing segment generated a revenue rise by 2.4% yoy to $543.2 million, driven by like for like sales growth during the second half boosted by the growing BCF post negative growth after first half of 2015. Ray’s witnessed a positive like for like sales growth during the second half on the back of the inventory clearance program to reposition the business. On the other hand, the gross margin fell 1% to 44.2% affected by BCF competitive pricing initiative and the dilutive impact of the Ray’s inventory clearance program. EBIT plunged 15.4% yoy to $32.3 million impacted by depreciation and amortization costs attributable to store rollout and investment in group programs. The group’s focus on Ray’s clearance program would drive its future growth. SUL has three pilot stores in development for which would open in second quarter of FY16. BCF stores opened three new stores in FY15, but closed four Ray’s stores. Total stores reached to 117 BCF with 53 Ray’s in FY15.

     
       
       Leisure retailing segment Performance (Source: Company Reports)

• Rebel and Amart Sports drove Sports Retailing: Sports Retailing revenues surged 8.6% yoy to $783.6 million, driven by Rebel and Amart Sports growth and new store sales growth. But, gross margin fell by 1% to 44.9% due to rising lower margin categories (like fitness technology), promotional activity as well as first half clearance of excess inventory. EBITDA and EBIT surged by 10.8% yoy and 11.5% yoy to $93.2 million and $73.8 million respectively during the period. The group maintained old stock below 5%. During the period, six new Amart Sports stores were opened but two Rebel stores and two Amart stores were closed. Meanwhile, seven stores were refurbished, leading to a total stores of 90 Rebel, 1 RebelFit and 56 Amart Sports stores as at June 2015. The group is restructuring its Workout World to integrate it into Rebel by closing 5 stores this year and intends to close more 5 stores in FY16. Rebel / Amart club membership reached 2.6 million with 1.4 million active members. The group is focusing up to 25% of the range being private and exclusive brands. Meanwhile, Infinite Retail (earlier known as VBM Retail), in which the group has 50.05% ownership from July 2014, is consolidated to the Sports Segment Result net of non-controlling interest. Accordingly, the costs and adjustments incurred during integrating the business have led to a share of loss of $3.6 million.

 
 
      
     Sports Retailing Performance (Source: Company Reports)

• Balance Sheet highlights: SUL improved its operating cash flow strong to $196.2 million as at June 15, against $186.9 million in pcp, and leveraged this in investing in new stores and multi-channel development program. New and refurbished store incurred investments of $53 million with $20.5 million used in Auto, $5.8 million in Leisure and $12.5 million incurred in Sports. SUL also invested in DC network expansion (Brendale Qld), building Inventory management capability (JDA) and in General IT projects. SCA average inventory per store rose 2% on a year over year basis affected by rising imported products and falling AUD which offset the inventory enhancement efforts. The Leisure average inventory per store surged 4% impacted by AUD currency and the direct to store conversion to distribution center program which rose inventories.  Sports inventory per store remained stable. However, the private and exclusive brand ranges led to increasing inventory levels.  SUL modified its debt facility during the year with facility limit rising to $635 million and prolonged for more 12 months.

       
       SUL Daily Chart (Source - Thomson Reuters)

• Guidance: The group’s auto retailing witnessed a like for like revenues increase by 2.5% during the first seven weeks of the fiscal year of 2016, while the Gross margin remained on track. SCA estimates to start 15 new stores, and 65 refurbishments, extensions and relocations during the fiscal year. With regards to the Leisure Retailing, like for like revenues rose by  10% during the first seven  weeks of the fiscal year of 2016, driven by BCF and the clearance program in Ray’s Outdoors, Gross margin remained on track on the back of BCF competitive pricing and Ray’s clearance program. Leisure Retailing intends to open 5 new BCF stores and complete 20 BCF refurbishments. Ray’s shift is also on track having 5 initial pilot stores (with 3 in hand and 2 new stores are scheduled for September and October). As per the sports retailing, like for like Rebel and Amart Sports sales growth rose by 4.5% during the first seven  weeks of the fiscal year of 2016, and SUL intends to begin 8 new stores, close 3 stores and refurbish 12 stores across the Rebel and Amart Sports businesses. Meanwhile, SUL estimates a supply chain development costs expected to be over $10 million during the year, while other development projects and Group Costs are forecasted to be over $2 million and $7 million respectively. Capital expenditure is forecasted to be over $100 million to fund the group’s new stores, refurbishment programs and digital investment.
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• Stock Performance: Super Retail Group generated a year to date returns of 18.6% (as of Sep 4), as compared to the broader S&P/ASX 200 index decline of 6.8%. On the other hand, the stock corrected over 15% in last three months (as of Sep 4 close) placing it at an attractive valuation, with P/E of 17.3x as compared to its peers like Wesfarmers (which has P/E of 18.3x). The group has a decent dividend yield of 4.7%. We suggest that the investors can use the recent correction to enter the stock given its solid long term potential, and accordingly place a “BUY” recommendation on SUL at the current price of $8.49
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