Premier's made-to-measure growth pattern

The results of Solomon Lew’s Premier Investments reflect the generally difficult conditions afflicting the Australian retail sector. There is, however, a distinctive element of something significantly more positive within the Premier Retail portfolio.

The overall result was okay in the recessed circumstances, with Mark McInnes offsetting flat group sales with the attention to costs that has been a feature of his retail management.

With like-for-like sales down 1.8 per cent, the retail businesses were able to increase their earnings before interest and tax 4.1 per cent, largely because McInnes was able to hold rents essentially steady and slash the ‘’other’’ costs of doing business 32.2 per cent, or by more than $10 million.

Across the portfolio there were signs of the stress that has afflicted the retail sector over recent years. While the Dotti brand grew sales 7.3 per cent and Portmans 2.5 per cent, JacquiE’s sales were down 2.3 per cent, Just Jeans’ 3.3 per cent and Jay Jays’ 11.1 per cent.

That’s the familiar story of Australian retailing. The less familiar in today’s environment is the growth story.

Premier has two growth brands, Smiggle and Peter Alexander. And we’ve known for some time that they have potential and McInnes has ambitions for them; that are almost unique among Australian retail brands.

Smiggle, which lifted sales 14.5 per cent, now has 17 stores trading and “very profitable” in Singapore as well as its own distribution centre in the country, whereas until quite recently Premier was flying its stock in.

McInnes plans to grow Peter Alexander 40 -50 per cent over the next three years in a strategy that, unlike Smiggle, is confined at this point to Australasia.

The strategy for Smiggle is far more ambitious. The original plan had been to take the stationary brand further into Asia, with Japan and Malaysia the key markets. While Malaysia is still on the radar in a modest way, Japan is now on hold after Premier concluded that the costs and difficulty of entering the market were too great.

Instead Premier plans a major assault on the UK market, aiming to open 200 stores over the next five years.

The UK market for Smiggle’s products is three times the size of the Australian market but is relatively similar in terms of the products. Most significantly, the UK property market is depressed, enabling Premier to strike very attractive long-term deals even as the UK economy appears to be turning up. The first UK store will open in February next year.

Despite the conditions Premier – with the investments in Smiggle, Peter Alexander, its Australasian and Singaporean supply chains and a 30 per cent increase in advertising and marketing – is shifting into growth mode after three years of focusing intensely on costs.

Solomon Lew has traditionally been cautious, which suggests he is positioning himself for some kind of upturn, although it is conceivable that the two brands in which the major investments are being made – Smiggle and Peter Alexander – are immune to external conditions at this point in their development.

It is worth nothing that Premier remains cashed up, with $313 million of cash, only $102 million of debt and a $185 million investment in Breville that could be cashed out if necessary within a balance sheet with total assets of $1.56 billion.

Whether it is to support the growth of the existing brands offshore or online (where sales were up 37 per cent) or to make a major acquisition, Premier has significant firepower if it wishes to deploy it.