Super Retail Group
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Super Retail Group’s market capitalisation of $1.8bn is now greater than both Myer and David Jones. Over the past decade it has expanded by acquiring numerous retail groups, now owning: Amart Sports, BCF, Goldcross Cycles, FCO, Ray’s Outdoors, Rebel Sport and Supercheap Auto. Smart sourcing and tight operations has helped this business produce impressive earnings before interest and tax (EBIT) margins of 9%. High margins, combined with a steady roll out of new stores, has seen earnings per share increase by over 90% since 2008. An impressive feat considering the retailing environment.
Still, the market remains well aware of the company’s success with the share price rising 64% this year alone. Adjusting for expected growth in earnings this year the company is trading on a forward EBIT to enterprise multiple around 11. New stores will continue to grow earnings, as will organic growth, spurred on by today’s interest rate cut.
Longer term, the underlying motive for cutting interest rates is a weakening economy; which spells bad news for retailers. We also have concerns over wider structural changes to the retail industry, an issue we’ll take up in more detail in the new year. Super Retail Group is a well run retailer, but with bank debt on the balance sheet and a rosy valuation, it’s hardly cheap. We’re happy to AVOID for now.
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