The S&P/ASX 200 Index (ASX: XJO) stock Super Retail Group Ltd (ASX: SUL) has suffered a 16% decline since Tuesday, 18 February.
When a company in a cyclical sector such as retail experiences a sell-off, it could be an interesting opportunity to examine before a potential recovery.
Just because something has gone down doesn't automatically mean it'll rise again in the short term. However, the broader economic challenges the business is facing may not always be present.
The owner of Supercheap Auto, BCF, Macpac, and Rebel recently told investors how the company performed in the first six months of its FY25 results. Let's remind ourselves of what the company said.
Earnings recap
For the six months to 28 December 2024, Super Retail reported that its sales had increased by 4% to $2.1 billion, supported by group like-for-like sales growth of 1.8%.
However, the gross profit margin decreased by 70 basis points (0.70%) to 45.6%, which didn't help the company's profit measures.
Total segment operating profit (EBITDA) declined 2.2% to $393.2 million, total segment earnings before interest and tax (EBIT) fell 6.5%, normalised net profit after tax (NPAT) dropped 9.9% to $130.8 million, and statutory net profit declined 9.5% to $129.8 million.
In terms of the sales performance of the individual businesses, Supercheap Auto sales grew 1.7%, Rebel sales rose 4.4%, BCF sales increased 6.9%, and Macpac sales grew 1.7%.
The company also gave a trading update for weeks 27 to 33 of FY25. Supercheap Auto sales were flat, Rebel sales were up 7%, BCF sales rose 11%, and Macpac sales increased 5%, leading to total sales rising 5%.
Pros of buying this ASX 200 stock
As I said at the start of this piece, I think the best time to buy a retailer is when the share price is much lower, and investors are worried about something related to the outlook.
Super Retail's share price is now significantly cheaper than it was a week ago. With interest rates now starting to come down, I'm expecting retail sales to rise a little, all other things being equal.
The company continues to grow sales, and its store networks are growing in size, helping scale benefits.
If I look at the current valuation, it's now trading at around 14x FY25's estimated earnings, according to Commsec, along with a potential grossed-up dividend yield of 6.8%, including franking credits. Those are fairly attractive shareholder metrics, in my view.
Negatives
The business' valuation was lower in May 2024 and materially lower in 2022 and 2023. It has dropped this month, but it could theoretically go even lower – it depends how much 'margin of safety' we want to achieve. Of course, it could go higher from here, too.
I'm not sure what growth rate of sales/profit growth the company will be able to achieve in the longer term, so it's difficult to say what the size opportunity is. That can influence the decision of whether it is a good price or not. But, its relatively low P/E ratio is not reflecting major expectations.
Will online retailers take market share? Or can the company grow its digital sales? We'll have to see, though the company continues to work on providing customers with the ability to purchase through whatever channel they prefer.
I think this is a solid business, and there could be a rebound opportunity from here. It'd be an even better buy if it were cheaper than it was a couple of years ago, but ongoing sales growth could help drive profits and shareholder returns higher.
