Retail's super power

An A-grade management team and cashed-up consumer base is helping Super Retail defy the sector's gloom.

PORTFOLIO POINT: As retailers struggle with the twin challenges of weak consumer spending and growing online competition, Super Retail is proving a rare success story.

Few ASX-listed stocks live up to their name in quite the same way as Super Retail Group. Since the broader market bottomed out in March 2009, it’s been 'up, up and away’ for the retailer that is most easily identified through its chain of Super Cheap Auto, Boat Camping Fishing (BCF), Rebel Sport and Ray’s Outdoors stores.

Through a combination of its ongoing store roll-out campaign and a canny acquisition strategy, Super Retail has gone from 176 stores at its IPO in 2004 to almost 600 stores today, and a market capitalisation of some $1.5 billion.

Its outstanding performance was last week recognised by global ratings agency S&P, which upgraded the stock for inclusion in the all-important ASX 200 index. This means the stock is now not only covered by small mid-cap investors such as OC Funds Management, but also comes onto the radar screen of the much larger pool of big-cap investment managers.

Let’s put Super Retail’s performance into some perspective.

Readers will be well aware that the consumer discretionary sector has not been a happy hunting ground for investors of late. Think of the spectacular falls from grace of department store goliaths Myer and David Jones (each having dropped around 30% and 50%, respectively, from their highs in the last 12 months) and KFC/Sizzler store owner/franchisor Collins Foods (which has halved in price since its IPO in August last year). Even market darling JB Hi-Fi has been abandoned, with its share price going from above $20.00 a year ago to around $11.00 today.

In this same period, Super Retail’s stock price has appreciated around 15%, its dividends have grown by a similar degree, its earnings guidance has been upgraded on no less than three separate occasions, and it has raised more than $300 million to fund the acquisition of 120 Rebel Sport/Amart stores. Super Retail is trading today at about $7.65, up from an IPO price of just $2.00 back in 2004.

So how has Super Retail done so well and why does the investment team at OC Funds Management still think there is further upside for investors?

Like many of the top quality businesses we come across, much of Super Retail’s success has been driven by an 'A-grade’ management team, which is highly focussed on its customer base. To this end, the Peter Birtles-led team has been on an extended store roll-out strategy, which has been complemented by bolt-on acquisitions (Ray’s in June 2010 and Rebel in October 2011) and the brand creation, launch and roll-out of BCF (and its New Zealand sister chain, Fishing Camping Outdoors). In particular, the BCF roll-out, which has been ongoing since July 2005, is widely regarded as an unqualified success.

Add to this strong store concepts, continuous store investment and refurbishment, product innovation and excellent sourcing/logistics solutions, and you have an outstanding retail success story.

And unlike many specialty retailers, Super Retail has significant exposure to a large demographic of potential customers that are directly benefitting from the booming resources market in Queensland and WA. When the tradies and labourers that are delivering the resources bonanza come back to town after a tough couple of weeks at the mine site, they are not rushing to the David Jones perfume counter to spend their hard-earned cash. They are going down to Ray’s for the latest camping gear, to BCF for some boating or fishing accessories, or to Super Cheap Auto to ensure their wheels are looking good for the weekend.

But what of the online threat that has struck at the Achilles of many of the other retailers mentioned above? Apart from having their own highly-evolved online strategy aimed at meeting this threat head-on, we believe Super Retail customers have a high propensity to physically shop in store, in order to get a feel for their potential purchase, rather than fish around online for an internet bargain. These two factors combined should limit any third-party online impact on Super Retail sales or margins.

Based on analyst consensus estimates, Super Retail is trading on 12.3x FY13. While it’s not the cheapest retailer in the sector, sometimes you just have to pay up for a quality business like this. It is yielding a little under 5% fully-franked and is still expected to grow earnings at more than 10% per annum over the next couple of years.

Add into the mix some much anticipated interest rate relief from the RBA in the coming months (positive for consumer sentiment) and we believe Super Retail is well positioned for ongoing outperformance.

Robert Calnon is portfolio manager at OC Funds Management.