We consumers can be a fickle bunch — our tastes change as trends come and go, we can be very sensitive to price and often have little brand loyalty. We’re also very timid creatures, running for cover at the first sign of trouble, be it real or imagined.
Despite the recent challenges of poor consumer sentiment, online competition and rising costs, a select few retailers have excelled. One such example is the rather aptly named Super Retail Group (ASX: SUL), which owns some familiar brands, including Rebel Sport, Supercheap Auto and BCF.
An impressive run
Since listing a decade ago, the business has seen consistent growth in its sales, and by no small measure. Super Retail Group has achieved an impressive annual compound growth of over 21% in revenue, and an even more impressive 27% rise in net profit. That stunning result has delivered 35-fold gains for investors who owned shares when the company listed. So much for the death of bricks and mortar retailing!
A big part of the story has been a rapid expansion in store numbers. For example, since listing in 2004, the company has grown its network of Supercheap Auto stores from 176 to 288 today.
It has also been rather aggressive in expanding into new categories, most notably with the move into sports retailing with the acquisition of Rebel Sport in 2011. Indeed, the sports retailing segment now contributes over one third of group sales. Across all of its divisions — auto, leisure and sports — the business now has over 600 outlets.
It is however wrong to assume that growth has come purely from the purchase or roll out of new stores, with like for like sales also showing a very impressive improvement over time — over 5% per annum since the GFC, which is quite remarkable.
Retail is detail
This is attributable to a host of factors, including a strong focus on employee and customer engagement, strong business analytics (that is, they really endeavour to understand their customers), a broad and relevant product mix and competitive pricing.
Importantly, although categories such as automotive, sports and leisure appear to be unrelated, they share some important characteristics. Firstly, the average ‘basket size’, or the amount customers tend to purchase when they visit, is typically low. For example, Supercheap Auto customers spend just $35 per visit, on average.
While consumers tend to spend less when times are tough, that’s not always the case for lower priced products. Indeed our spending on small ‘feel good’ items will often increase — what economists refer to as the ‘lipstick effect’.
Another shared attribute is that all the group’s categories cater to enthusiasts, or at least hobbyists. A fisherman is unlikely to give up his favourite pastime because the economy is not doing well, especially when said pastime is relatively inexpensive!
That was then, this is now
Despite all the above, the company and shareholders have recently experienced a change of fortune. After hitting a record high of $14.04 in November last year, Super Retail shares have since lost a third of their value.
Investors had become accustomed to the heady rates of growth discussed earlier, and so when the business recently revealed a 5.8% rise in first half sales and a 1.7% lift in profit, it came as something of a shock to many.
Rising costs, increased investment and discounting have all taken a toll, as has reduced spending in the group’s leisure division.
Down but not out
At $14, with a trailing P/E of 24 times, Super Retail Group’s shares were priced for something close to perfection, inferring high expectations for profit growth. When that wasn’t delivered, the subsequent share price fall to just over $9 was the predictable result.
Though the business has proven highly resilient in the past, and although the rate of growth has slowed, it is nevertheless still growing, and indeed continues to have good prospects for the future. Investors must be mindful to accept the changing nature of the business and price shares according to the more benign, though still attractive, prospects for the company.
Super Retail Group shares may look cheap when measured against recent highs, though are arguably still not necessarily cheap in absolute terms. The company has proven itself as an outstanding retailer and one well worth keeping on the watchlist. With shares perhaps best described as ‘fair value’, there is no need for investors to rush.