A worse than expected half-year result on Tuesday morning has driven Super Retail Group’s (SRG) share price down almost 15 per cent, as analysts and investors questioned its decision to spend $135 million acquiring Kiwi outdoor retailer Macpac Holdings.
SRG reported a 3 per cent decline in net profit to $72.2 million for the six months ended 31 December, as competitive pressures within the sports and leisure division, as well as transformation costs, weighed on margins.
Speaking to analysts and investors on Tuesday, SRG managing director and CEO Peter Birtles was asked repeatedly about his plans for the Macpac business, which will take-over the struggling Rays brand.
In response, he said there’s a “significant opportunity” in the market which BCF is unable to meet without diluting its current offer and Rays cannot adequately address alone.
“There’s a significant opportunity that sits in the market at the moment for somebody to offer a complete solution for outdoor adventure enthusiasts and also casual participants,” Birtles said in response to queries about whether SRG should be doubling down on the outdoor segment.
Birtles said that a recent review of Rays, which has been wound down and recorded a $3.5 million earnings loss in 1H18, prompted management to conclude that an acquisition would be necessary to adequately address the market in the coming years.
“[The review] confirmed that a key part of the financial performance of an [outdoor adventure] business is strong vertical integration and scale.
“When we assessed our opportunities, we felt that the best way of achieving scale and vertical integration was to acquire a business,” Birtles said.
Under its previous majority shareholder CHAMP Ventures Macpac grew to a network of 54 stores across Australia and New Zealand, booking top line growth of 20.9 per cent in the nine months to 31 December.
Birtles said he was confident the business had much more room to grow, and that he was comfortable with the level of cost the previous owners had removed from the business since acquiring it two years ago, despite conceding that costs would need to be put back in moving forward.
“There’s plenty of runway ahead of Macpac in terms of digital, a strong commercial business that can continue to grow, and a brand that we feel can be invested in more,” Birtles said.
“We’re comfortable with the price we paid for the business, we think its good value.”
Macpac is positioned to deliver around $16 million in pro forma earnings for the year ended 31 March, which Birtles explained was a conservative figure that took into account additional costs SRG would put into the business.
The transition of Rays into Macpac is expected to take a full-twelve month, after which management believes there’s room for $3 million worth of synergies that can be achieved.
While one analyst noted that figure as relatively low, SRG may also pursue further synergies in apparel, design and sourcing with BCF and Rebel in the long-term.
Over five years Birtles said there’s potential for around 75 small format Macpac stores in Australia and New Zealand, as well as 20 larger format locations.
But he did say that management is of the view that the “days of retailers driving value through lots of store roll-outs is changing” and that one of the biggest opportunities Macpac had was digital in nature.
“We certainly see that this is a market that has strong opportunity in terms of digital, and so we’d anticipate a high component of the business coming from a digital channel.”
Digital driven future
Birtles’ comments on Macpac are consistent with his views on the future for the broader group, which he outlined repeatedly on Tuesday morning in response to questions about SRG’s store portfolio and its place in the market.
Pointing to flat growth in consumer spending across SRG’s physical stores buy growing online spending, Birtles said that SRG’s big opportunity remains growing its market share online.
“Our opportunity for the longer term continues to be to sustain and incrementally grow our market share through physical channels…but then our big opportunity is to grow our share of the growing part of the market, which is the online side,” he said.
Online sales are now up to around 7 per cent of total group sales, a figure management believes could skyrocket in the coming years as it looks to leverage its physical network for store-based fulfilment and expanded click-and-collect programs with in-store lockers.
Transforming the business is coming at a cost though, and Birtles alongside CFO David Burns were prompted to defend an increase in operational costs in the first-half.
Management confident amid margin and cost pressures
Competitive pressures were also a point of concern, with Birtles conceding that sales growth was driven by volume and a 30-basis point gross margin increase driven primarily by supply chain improvements rather than price.
“Our LFL performance has been solid [but] its predominately coming from across the group on a volume basis, as opposed to price because of investments we’re making,” he said.
“[Margin] has been driven by the work we’ve been doing around supply chain and transformation initiatives across the group as opposed to price improvements.”
Pressures were felt within the BCF business, which recorded slightly softer sales than management had expected, but managed to grow its market share by .9 per cent as competitive intensity mounted.
As a result, Birtles said BCF increased its market share by .9 per cent during the half, after subdued trading in October and November was offset partially by better December trading.
In sport weakness in stores converted from Amart Sports in Queensland – which was expected – weighed on Rebel’s sales, compounded by worse-than expected holiday trading in equipment.
But despite the headwinds Birtles expects solid LFL growth in the second-half and a flat operating margin growth as the business continues to invest in omni-retail transformation
“In terms of establishing and building the business in the long term we’re very pleased with what we’re seeing and we’re on track to sustain this business to be successful long term,” he said.
He did, however, admit that consensus estimates around full-year earnings would need to be managed in the coming months.
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