Australian Retailers should take a page from Smiggles' book

Australian Retailers should take a page from Smiggles' book

Oroton Group (ORL), which owns brands such as Gap in addition to the core Oroton brand, today released its half year results for the period ended 28 January 2017. The numbers were not pretty. Revenue was down 10%, earnings per share was down 51% and the interim dividend was cut to $0.00. The result highlights some of the challenges facing the local retailing sector as a result of increased competition from international brands and relatively weak wage growth in Australia. Not all local retailers are struggling, however, as those that adapt and innovate can still thrive in the current environment. Premier Investments (PMV) (which I covered recently, click here to read) owns brands such as Smiggle and Peter Alexander that are both reporting excellent results. The stark contrast between these two companies highlights the difference that strong management and corporate strategy can make to a company.

Myer (MYR) is another well-known local retailer that has been doing it tough recently. The retailer released its half year results recently (which was also covered, click here to read) which showed the company was still facing difficulties but looked like they might be turning things around. The share price has been trending down since it listed in 2009 and it appears an opportunistic buyer has taken advantage of the low price. A very large block trade in MYR shares went through yesterday at $1.15 per share, a premium to the prior market price of around $1.08. The trade has fuelled speculation that PMV’s largest shareholder, Solomon Lew, is behind the trade and may be lining MYR up for a take-over bid. At this stage, this is all pure speculation as even the identity of the buyer isn’t known yet. We will need to wait for the change in substantial shareholder statement to find out who the buyer of the MYR shares was.  

Regardless of whether PMV was the buyer, the mere suggestion that they might be highlights the strength of their balance sheet. PMV has been so successful with the Smiggle brand that the aggressive expansion plans (PMV plans to open 48-58 Smiggle stores by Christmas of this year) can be largely internally funded and therefore its balance sheet could theoretically be used for an acquisition. PMV is clearly a well-run company, with former David Jones CEO Mark McInnes in charge and from a valuation point of view, it is potentially a strong growth company that can be bought at a much lower price than many other ASX ‘growth’ stocks.  

The vastly differing financial performance of these three companies shows the effects of a strong competitive environment. Retailers must not become complacent, even large, entrenched brands can quickly see financial results deteriorate if they stop innovating. The Smiggle story shows that even a simple idea (fun stationary) can perform extraordinarily well if executed properly. Investors in the retail space need to find companies that are adapting to the times and would do well to consider a company like PMV.

Ready to chat about your portfolio? Get in touch today via email: william.oloughlin@rivkin.com.au or by phoning +612 8302 3633. 

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