With the near-20 per cent collapse in Myer’s share price after last week’s results presentation, much of the focus on Solomon Lew after his $200 million David Jones payday will be on what he might do next. The reality is that he doesn’t actually have to do anything because his Premier Investments is humming along very nicely in a difficult retail environment.
Within a solid Premier Investments result, its core Premier Retail group produced another very strong performance, lifting sales 6.2 per cent (4.7 per cent on a comparable stores basis) and underlying pre-tax earnings 13.4 per cent to $87 million, with all of its brands generating comparable stores sales growth in the second half.
For a discretionary fashion-based retailer, that’s a stellar result, underpinned by the continuing decline in the group’s cost of doing business relative to sales that has been a feature of Mark McInnes’ term as chief executive of the retail group.
Premier’s retail margin (earnings before interest and tax as a percentage of sales) is a very healthy 10.4 per cent. It has been able to main a gross margin of more than 62 per cent.
With net cash of about $200m within his listed vehicle ($313.3m of gross cash) and a $265m shareholding in Breville that could be cashed out, Lew does have the potential to take on Myer. Premier says the cash reserves are being maintained for "growth opportunities".
McInnes’ team is also demonstrating that it has the retailing skills to fix damaged brands and tightly manage a diverse portfolio of brands and store networks. In Lew, it also has a vastly experienced retailer, strategist and consummate deal-maker, as his lucrative intervention in the David Jones takeover illustrated.
His manoeuvrings around David Jones (he offered to joint venture David Jones with South Africa’s Woolworths or buy its Country Road business from it) would suggest he is in the market for a major acquisition. With a share price touching $2 and a market capitalisation of only $1.2 billion against Premier’s $1.54bn, Myer is vulnerable.
Lew, however, quite pointedly said today that Premier didn’t own any shares in department store groups "anywhere in the globe" or, indeed, in any other retailers. That could change, but Premier is also keeping an eye open for bolt-on acquisitions, which would be more in keeping with the kind of incremental and largely organic growth strategies it has been pursuing.
There is a lot of growth potential within Premier itself, which is in the enviable position of owning all of its own brands. That creates both a defence and an opportunity in an increasingly online retail environment.
Premier is experiencing accelerating growth in its online sales, which were up 30.5 per cent for the year and 37.5 per cent in the second half. McInnes says the channel was "extremely" profitable and that Premier’s aspiration is to eventually generate 10 per cent of its total sales from its multi-channel offering.
Within the portfolio, Premier also has two 'star' brands, Smiggle and Peter Alexander.
Smiggle, which grew sales 17.4 per cent to more than $100m, is being expanded aggressively offshore. There are 18 stores now operating in Singapore which are "very profitable" but the big drive is in the UK, where Premier opened eight stores in the second half and expects to open another 10 in this half-year.
Premier is excited by the initial response to the brand in the UK, saying three of its top 10 Smiggle stores by turnover are in the UK. It will have 25 to 30 stores operating by the end of this financial year and expects the brand to be profitable in the UK within 2014-15.
It is now looking to enter Malaysia, saying it may have two or three Smiggle stores operating there in 2015 or 2016.
Peter Alexander sales grew 21.4 per cent driven by the ongoing, aggressive expansion of its store network. Up to 15 more stores may be added across Australasia over the next two years and beyond that Premier is researching the brand's potential in the UK in the post-2017 period.
McInnes says the UK is a ''massive market for pyjama wearers'' and that the Peter Alexander product is unique. He hopes to update the market on his plans for the brand early next year.
Lew would also be satisfied with the performance of the 'other' brands. Just Jeans appears to be turning around, with second-half sales growth of 7.8 per cent; Portmans, Dotti and Jacqui E "continued to deliver strong results and solid growth" and Jay Jays had positive comparable sales growth and some margin improvement.
While most of the brands are either performing well or improving, beneath them McInnes is rebuilding the group’s supply chain and says that the program will deliver savings of more than $2m a year within three years.
Premier has delivered its result and its sales growth despite the continuing invasion of the local market by big brand offshore retailers. McInnes isn’t complacent about their potential impact, but his results continue to speak for themselves.