Premier Investments: There's profit in pyjamas

Tough retail conditions continue, and strong brands are prevailing

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published March 23, 2012 4:22 pm AEDT

Premier Investments Limited (ASX: PMV) today released its first half results for the six months to end of January 2012, with the company reporting net profit after tax of $38.5m on revenues of $449m. Revenues were down 5.8 percent on the previous corresponding period, with net profit down 2.4%.

Investment income was up 6 percent on strong returns from the stake Premier holds in Breville Group Limited (ASX: BRG). The company's investment in Breville is currently worth $130m. Premier confirmed its full year EBIT guidance for $80m-$95m (excluding the investment in Breville).

The market liked the news with shares up more than 4% early this afternoon.

Fashionable Trend?

Premier Investments operates several speciality retail fashion chains through Just Group. The company's brands include Just Jeans, Jay Jays, Dotti, Portmans, Jacqui E, Peter Alexander and Smiggle. The company also holds 25.7% of Breville Group. Premier is expanding into Asia, as well as opening more stores within Australia and New Zealand.

For many fashion retailers, OrotonGroup Limited (ASX: ORL), Noni B Limited (ASX: NBL) and Speciality Fashion Group Limited (ASX: SFH) for example, online sales are being aggressively pursued.

Premier is no different, with all seven of its brands online – and online sales increasing by 100%. Premier has an advantage in that all of its brands are proprietary, so it has complete control over margins and the prices it can charge online. The company aims to reach 10% of total company sales online by 2015.

The company did note that rent increases are an issue and Premier is looking at closing loss making and marginal stores, and trying to negotiate better rental deals when leases come up for renewal.

Premier is also focused on keeping costs under control, with 30 projects underway throughout the company aimed at reducing its cost of doing business (CODB).

Smiggle and Peter Alexander

Smiggle and Peter Alexander are the two brands that Premier is focusing most attention on, as they are experiencing the highest rates of growth, with Smiggle's revenues growing by 18% over last year, and Peter Alexander's revenues growing by 15% over the same period.

The company obviously still believes in bricks and mortar in some areas, with plans to open 70-100 Smiggle stores throughout Australia and New Zealand and up to 30 Peter Alexander stores in the next three years.

Fashion is fickle

Despite the success of Smiggle and Peter Alexander, several of the company's brands are underperforming. The company closed 11 Jay Jays stores during the half, with revenues falling 15% on last year. Jacqui E sales were down 14.6%, Dotti sales were down 11.6%, Portmans revenues were down 6%, with 9 stores closed, and Just Jeans closed 6 stores with revenues down 4% on last year. Victims of weak consumer sentiment, or just passing fashions? I suspect its more to do with weak consumer sentiment, which looks likely to continue for some time.

The company indicates that further expansion of the Smiggle brand into Korea, Japan, China, Hong Kong and Malaysia is likely, after market studies show those countries all have lucrative personal stationery markets. The company also stated that analysis of competition in these countries is no more or less competitive that the current Australian market, and believes this is an opportunity for Smiggle.

The Foolish bottom line

With $300m in cash and only $118m in debts, the company has a fairly strong balance sheet. The expansion into Asia with Smiggle and Peter Alexander appears to be bearing fruit and looks likely to be a positive for the company in the future. The company is trading on a conservative forecast P/E of 9.3, and paying a dividend yield of more than 6.7%, fully franked. Certainly one for the watchlist.

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Motley Fool contributor Mike King owns shares in Oroton. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy

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