Daily notes – Premier

On the lookout for a new uptrend

Premier’s stock price has been in a broad trading range for three years, having spent most of this time oscillating between $14 and $17 per share. It had been in a strong uptrend for the prior three years, during which time the stock price more than doubled.

While the stock price has flatlined, the underlying business itself has continued to perform strongly. Sales have grown at a compound annual rate over the last three years of nearly 7%, and EBIT has compounded at 9% over the same period.

Not to mention the company’s investment in Breville Group (BRG), which has appreciated by more than 100% over the period and is now worth more than $600m, a not inconsiderable amount given PMVs total enterprise value of ~$2.5b.

Perhaps more importantly, the company’s various growth engines have finally begun to account for a more substantial portion of the overall business and to move the needle at the top line.

Online sales have grown from $22.5m in H1 16 when they accounted for 4.6% of sales (in countries & brands with a transactional website) to $75.7m, where they account for 12.9% of sales. The online channel will continue to increase as a percentage of total sales, which will have an increasingly positive effect on EBIT margins as rental costs decline as a percentage of overall sales.

Smiggle sales have grown from $107m to $179m during the same period. Peter Alexander sales have shown similarly impressive growth, with total sales in H1 19 of $130m, up from $87m in H1 16.

Premier has global ambitions for the Smiggle brand and is pursuing these ambitions through a range of strategies, including wholesale, online, concessions and standalone stores. The company will continue along any route that makes sense from a return on capital perspective. Smiggle has the potential to be a truly global brand with a very long sales growth runway ahead.

Premiers announced plans for Peter Alexander are currently more modest, with a 2020 sales target of $250m p.a. However it’s clear that the brand also has global potential, and in time this will become part of the strategy.

Overall there is vast potential embedded in the Premier business. Smiggle alone could become a $1b brand. Management has a lot on their plate in terms of realising this potential, and it will take some time for real momentum to build in the global strategy. However, the possibility is there, and management has proven themselves very capable over time.

PMV is one for the watchlist as the stock treads water, but we’re on the lookout for the beginning of a new uptrend, especially if the stars align for the business and the brands begin to fulfil their global potential.

By Danny Sandler

Founder of Ocean Asset Management.