SUL shareholders have been experiencing a rollercoaster ride over the last year. The stock, which bottomed in December, has bounced back strongly this year, raising concerns over its valuation
. Year to date, shares of SUL are up over 30%.
Major threat to the valuation is the fluctuating demand. Barriers to entry are limited, but SUL’s strongest competitive advantage is the scale, which has allowed the development of an efficient supply chain and comprehensive as well as flexible product categories.
SUL deals with automotive, leisure, and sports products in Australia and New Zealand. The company currently operates 640 stores across both countries. Apart from Supercheap Auto, its other businesses are sporting and outdoor goods stores Rebel Sports, Amart Sports and BCF. All these are quite popular among the consumers as they offer personalisation.
The specialty retailer has expanded its business over the past five years, but the retail trade and personal consumption are reeling low. Profit from these segment depends on the consumer spending, which as of now is not very encouraging. Recent gross margins for the firm was down owing to the promotional activity acrossthe Amart Sports and Rebel business lines. Though such promotional activity dragged the margins down, the benefits of this will be realized in the coming years.
At present, the stock is paying a 4.2% yield on the back of falling price. Apart from an impressive yield, SUL has been able to double its annual dividend in the last five years for an average annual growth rate of 18.5%. Though it may appear attractive to the income investors, the fact that its fundamentals does not fully support these numbers may be seen as a time to go cautious.
For the most recent half, sales at SUL increased by only 5.7% as the leisure division remained an underperformer on the basis of earnings. The company is restructuring the segment, but expects the total group sales to be lackluster until historical growth rates are achieved again.
Sports division of SUL is still the hero with an increase in like-for-like sales of 7.4% and total sales growth of 15% compared to the corresponding quarter of the previous year. However, gross margin of the segment was below the previous years due to ongoing promotional activities at Amart Sports and Rebel business line.
Depreciating Australian dollar is not positive for the importers such as SUL. The company is dependent on importing a range of its auto product, and a lower dollar will increase the prices paid thus raising the bills for the company. Even though, SUL has been decent till now in managing these risks, there is still a challenge for the management as the dollar could significantly drop from here. Since a consumer sentiment is weakening over the past two years, and discretionary retail sector is the first to be affected by the change in the sentiments, it may go against SUL.
Annual total shareholders return has gone down alarmingly in the past year suggesting investors are not getting the desired returns. Further, annual return on equity has also come down hinting investors return are getting squeezed. Meanwhile, the net debt has increased for the company, which again is not a very healthy sign given other metrics are not very favorable.
Annual Shareholder Return (Source: Company Reports)
This year has been quite volatile for SUL, where stock after dropping towards the end of last year recovered strongly. Even though the stock could look an attractive play to some, valuations suggest it is quite an expensive bet with negative annual total return to shareholder, declining return on equity and increasing debt.
Super Retail Group Daily chart (Source - Thomson Reuters)
Australian economy is also not in a great shape, and consumer spending is declining, which will surely impact the retailers across the country. SUL will need to overcome dollar weakness, increase its sales and enhance its bottom line growth going forward. At present the shares are looking quite expensive considering the valuation metrics, which are not very healthy with segment sales tumbling.
Net Debt (Source: Company Reports)
On the basis of above reasoning we recommend the stock as EXPENSIVE at current price of $9.39.
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