Can Super Retail Group serve up an ace for your portfolio?

Credit: sling@flickr

Surfing the free-to-air channels this week would have been a tough proposition for anyone who doesn’t like sport. While Australia’s one day cricketers were hosting India, the hugely successful shorter domestic Twenty20 format of the game was reaching its climax on another free-to-air channel.

At the same time, Channel 7 was serving up its annual feast of tennis, blanketing several of its digital channels with Australian Open coverage.

And this is apparently considered to be the “quiet” time of the year for the sporting calendar, with the AFL, NRL, rugby union,  netball, Twenty20 World Cup, V8 Supercars, Formula 1 and Olympics yet to come!

Super Retail Group (ASX: SUL) is one of the best placed stocks on the ASX to benefit from our undoubted national obsession with sport, but how does the business measure up?

One business, many brands

Super Retail Group actually began life in the 1970s as what would now be called a “disruptive startup”. The original business was a mail order catalogue for auto parts and accessories, which soon proved popular enough to transition to traditional retail stores, which eventually grew to have a national presence under the name Supercheap Auto.

Since listing on the ASX in 2004, the company has acquired several other brands, diversifying its focus well beyond the original automotive roots of the company. The first material acquisition was that of cycling store Goldcross Cycles, followed by outdoor retailer Ray’s Outdoors.

The company further entrenched itself in the leisure and sports sector with the 2011 buyout of the Rebel Group, which brought the scale of Rebel Sport and Amart All Sports businesses into the wider group.

The company also has a history of growing brands organically, launching BCF (short for boating, camping and fishing) in 2005.

Supercheap Auto now has 290 stores, while Rebel and Amart collectively have over 140. BCF has proven to be a home grown retail success story with 91 stores, while the more niche Goldcross Cycles is now part of a store-in-store concept embedded within Amart stores. Ray’s Outdoors has over 55 stores in Australia catering primarily to the camping and outdoor lifestyle markets.

A healthy business…

The major strength of Super Retail as a business is the number of contact points it has with the Australian leisure, sport and outdoors market. For example, if you were looking to buy new sporting equipment for your kids or yourself, it would be hard to avoid a Rebel Sport or Amart store.

For new camping equipment or an upgraded fishing rod, Ray’s Outdoors or BCF would likely be a convenient option with a wider range and higher quality options than the more generalist stores that sell similar equipment like Kmart and Target.

Super Retail is also the kind of business that is somewhat insulated from online competition. The reason is that sporting equipment, like furniture, is a category that is higher value, and low familiarity. Both these things mean that physically handling or trialling an item is a key part of the buying process.

In addition, from a common sense point of view, it wouldn’t make as much sense to buy a new tennis racquet, cricket bat or pair of shoes worth a few hundred dollars without holding, swinging and testing them first.

The scale of Super Retail Group also means buying power, which allows it to purchase larger quantities of goods and negotiate discounts with suppliers. These discounts can then be passed on to customers, which entrenches the cost advantage of the business over small groups and independent operators.

… but not without challenges

2015 was a difficult year for some of Super Retail’s smaller brands. While Supercheap Auto, Rebel and Amart Sports all reported increases of between 3% and 7% in EBITDA, Ray’s Outdoors, Workout World and the New Zealand focussed FCO (Fishing, Camping and Outdoors) struggled.

In light of this, the business booked over $29 million in restructuring costs and losses, which was significant in the context of a net profit of $81.1 million after these expenses. These actions should mean that these laggard three brands are less of a drag on operations in 2016.

Another major hurdle for the business to clear is the falling Australian dollar. A significant proportion of goods sold by Super Retail brands are sourced from offshore, so weakness in the Australian dollar has a direct impact on input costs and margins. However, the playing field with regard to foreign exchange is similar for all competitors in the space, which mitigates some of the competitive pressure which might otherwise be felt.

Foolish takeaway

Super Retail Group is not a business without challenges, but its status as an entrenched market player with a significant national store footprint in automotive, leisure and sporting goods as well as recent initiatives to streamline the brand offering should result in strong growth in coming years.

Super Retail might be well placed for the sporting trend, but there's a much much bigger trend out there...

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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