Super Retail Group (SUL) – Lifestyle pursuits

March 27, 2024

Super Retail Group is the owner of the Supercheap Auto, Rebel, BCF and Macpac brands, which have positions in growing high-involvement lifestyle categories of auto, sports and outdoor leisure. The company has more than nine million active loyalty club members, and sells via a network of 716 stores and online. Super Retail’s first-half FY24 sales of $2.0 billion and pretax profit of $204 million were in line with guidance from January 2024. The board declared an interim dividend of $0.32 per share, fully franked, representing a 50% payout ratio. Trading momentum is softening across Super Retail’s three largest brands, Supercheap Auto, Rebel, and BCF. The group’s comparable sales are declining, down 2% in the first seven weeks of the second half of FY24 on a year ago. This contrasts with comparable sales growth of 1% in the first half. We expect consumer demand for sporting and camping goods to revert to category-trend levels. We estimate recreational retailing sales volumes in the December quarter 2023 were still 6% above trend. Our sales and earnings forecasts are unchanged. We maintain our $10.50 per share fair value estimate on Super Retail, with shares screening as materially overvalued.

This reflects our more cautious view on the group’s profit margin outlook – we forecast sales to decline by mid-single digits and pretax profit margins to further deteriorate in the second half of FY24. Group sales increased by 3% in the first half of FY24, but pre-tax profit margins declined by 90 basis points (bp) to 10.2% versus 11.1% a year ago, as higher wages, rents, and utility bills more than offset the improvement in gross profit margins. For the full year, we forecast a 150bp decline in pretax profit margins, driven by operating deleverage as costs rise by more than sales, and as weakening demand for leisure goods intensifies competition. The e-commerce arm is significantly outperforming the bricks-and-mortar stores – online sales increased by 10%, while store-originated sales grew by a mere 2%. We think the outperformance of online flags a resumption of the structural shift toward e-commerce.

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