Why I think you should add Premier Investments Limited to your portfolio

Credit: Kira

Whilst the name Premier Investments Limited (ASX: PMV) might not be familiar to a lot of people, the brands the company owns and operates certainly will be.

These brands include names such as Just Jeans, Jay Jays, Portmans, Dotti, Jacqui E, Peter Alexander, and Smiggle. Of all the brands, it is the last two names that attract me most to the company. These two brands stand head and shoulders above the others and have international success written all over them in my opinion.

Peter Alexander is a hugely popular sleepwear brand which has been growing at an impressive rate recently. In the first half of the year the segment produced revenue of $89.1 million, up 22.5% on the same period a year earlier.

The success of this unique and appealing brand in the Australian and New Zealand markets is clear to be seen. But I don’t believe it will stop there. In my opinion this is a brand that would be received well by consumers in most markets around the globe.

Although there are no known plans for expansion outside Australia and New Zealand at present, I do hope to see Peter Alexander make a move into the UK market in the future. The company certainly has a strong enough balance sheet to support this sort of investment. Currently it has $288.4 million in cash and equivalents.

One Premier Investments brand which is already making waves in the United Kingdom is stationery retailer Smiggle. In the first half of its fiscal year the Smiggle segment produced a stunning result that saw its global sales rocket by 46.5% to $109 million. The opening of 18 new stores in the UK was clearly a boost, bringing its total store footprint in the region to 42.

But it isn’t about to stop there as far as management is concerned. Within the next five years they expect Smiggle’s UK business to expand to the point that it will be contributing a massive $200 million in sales per year.

One thing which is particularly pleasing about this is the profound effect it will have on the bottom line. Although the company doesn’t report individual segment margins, it has stated in its reports that Peter Alexander and Smiggle provide it with high margins. This may go some way to explaining why its overall earnings before interest and taxes margin climbed by a solid 180 basis points to 16.1% in its half year results.

This is all the more impressive when you consider that the weaker Australian dollar has been a headwind for the company. The majority of its inventory purchases are denominated in US dollars, which is putting pressure on its gross margin.

Speaking of inventory. One ratio that I like to use for judging how well a retailer is performing is its inventory turnover. This measures how many times a company’s inventory is sold and replaced over a particular period.

What I look for in a retailer is an inventory ratio that is both strong and expanding. Companies that grow their inventories quicker than their sales set off a little alarm bell in my head. After all, excess inventory more often than not leads to retailers having to discount goods which negatively impacts margins.

The good news with Premier Investments is that it is turning over its inventory at an increasingly higher rate. For the first six months of its fiscal year it turned its inventory over 5 times, which was an increase from 4.4 times a year earlier.

Whilst a number of Australian retailers such as Myer Holdings Ltd (ASX: MYR), Kathmandu Holdings Ltd (ASX: KMD), and RCG Corporation Limited (ASX: RCG) appear to be struggling in the current retail climate, I feel Premier Investments’ strong brands and international expansion will help it continue to prosper.

For this reason I believe it is not only one of the best retail shares to invest in, but also one of the best shares on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) that you could invest in.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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. I contribute to The Motley Fool as a freelance writer and the thoughts and opinions in this post are my own, not that of The Motley Fool’s.

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