Special Free Report From The Motley Fool


Please note that this report has been superceded by our Top Dividend Stock for 2015-2016 since May 20, 2015. You can find the new report here.

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Premier Investments

Company snapshot (data as of March 16, 2015)

Premier Investments Limited (ASX: PMV)

Market cap: $1.9 billion

Recent share price: $12.18

Cash/debt: $313 million/$120 million

Trailing P/E: 23.5x

What do a jeans retailer, stationery shop and more than $300 million in cash have in common? If you answered that they (in part) make up Premier Investments (ASX: PMV), we doff our jester's caps to you.

Premier ‚Äď the retailing group cum investment cashbox ‚Äď is the company behind retail brands Just Jeans, Jay Jays, Dotti,¬†Jacqui E, Portmans, Peter Alexander and Smiggle. It also had $313 million in cash at the end of July 2014, and owns 27.3% of listed whitegoods distributor¬†Breville Group (ASX: BRG) ‚Äď those 35.6 million shares are currently worth $247 million.

A Smiggle store.
Inside a Smiggle store.

By the Numbers

Premier Investments (the company) has two main business units ‚Äď Premier Retail, which contains the group's owned¬†and operated retailing businesses, and the Premier Investments division (not to be confused with the company name itself), which handles the company's investment activities, including its stake in Breville.

In the last financial year, Premier Retail (also known as the Just Group) turned in revenues of $888 million, up 6.2% on the prior year, with same store sales growth of 4.7%.

Like-for-like sales are an important measure of retail success, as that metric strips away the impact of new store openings or store closures, to show the underlying business strength. While most of the businesses within Premier Retail delivered good growth, the company's Jay Jays brand posted a slight decline in sales, a significant improvement over the previous year.

We've made the point before that your advisors don't consider ourselves fashion experts, so we hope you'll forgive our explanations of the company's brands. (Importantly, though, as fashions and trends can change quickly, we think being able to understand the business itself is more important than trying to forecast the make-up of the new season's ranges!)

Just under 41% of Premier Retail's business is made up of its jeans and associated fashion brands Just Jeans and Jay Jays (23% and 18% respectively), while women's fashion brands Portmans and Dotti, sleepwear brand Peter Alexander and cool stationery brand Smiggle each count for between 12% and 14% of sales, and Jacqui E clocks in at 8%.

Revenue by business FY2014
Source: Premier Investments Annual Report


Impressively, despite low levels of sales growth, Premier's efforts to control costs and boost margins appear to be paying off. Gross margins continue to be strong, hovering around five-year highs of 62% and discretionary costs were kept in check, allowing management to spend more on staffing and advertising, while still delivering 13.4% growth in net profit before tax.

The brightest spots in the most recent half were the growth of the company's online retail offerings, which grew at 30.5%, well in excess of overall online sales growth.

The company reported that 18 stores opened in Singapore are all trading 'very profitably', giving Premier reason to believe its plans for further expansion into Asia and beyond will be a profitable pursuit for the brand. Smiggle UK is expected to be profitable in the 2015 financial year, with all UK stores turning a profit within the first year of operation. Premier expects to be able to roll out as many as 200 stores in the UK over the next five years.

Premier's Investments division houses the company's investment in Breville Group, currently valued at around $247 million as well as some other small investments. Breville alone delivered dividends of approximately $8.7 million to Premier in the 2014 financial year.

Lastly, as mentioned above, Premier has a cash hoard of over $310 million, a balance which has been largely stable for four or five years, indicating it is not going to be rushed into an unattractive acquisition due to that cash burning a hole in its corporate pocket. Partially offsetting that is around $120 million of debt.

Impressive, if Controversial, Management

Premier Investments is also well-known partly because of the two men at the head of the table ‚Äď Premier's Chairman, billionaire Solomon Lew, and its CEO, former boss of David Jones Mark McInnes.

Lew, often described as a 'billionaire rag trader', has had a long and successful ‚Äď if sometimes controversial ‚Äď career in¬†the retail business, and the private company of which he is a director, Century Plaza, and its associates own over 42% of¬†Premier.

Lew has previously been a director and Chairman of Coles Myer (before the business was split) and Premier was a major shareholder of the company. Lew's split from Coles was a controversial end to that relationship, with allegations of wrongdoing against Lew unable to be proven, and he was cleared of any wrongdoing.

Speaking of controversy, Mark McInnes, the company's CEO, has also had his share of media attention, after he left his former employer, David Jones, amid allegations of improper conduct. McInnes has also been accused of underinvesting in David Jones stores during his reign as the department store's boss.

While neither man has had a smooth path in the business world to this point, we are impressed by their retailing nous and track records. Lew and McInnes have also attracted talent to the management ranks and board table to bolster the business' retailing expertise, while at the same time keeping a close eye on costs.

The Competition

Retail is a notoriously tough business. Fashion retail doubly so. Seasons ‚Äď and fashions ‚Äď come and go quickly, and some¬†bad decisions by its buying team can lead to lower sales and high levels of unsold inventory.

Source: Premier Investments

While many companies blame the weather for bad sales (but interestingly enough, never credit the weather for good sales!), fashion retailing is one business where the weather does play an important part.

A winter season that arrives a month late due to an unseasonably warm start to June, or a summer that has colder¬†than usual maximum temperatures really can impact consumers' buying habits ‚Äď and that's bad news for a company that has limited season lengths and quickly changing fashions to deal with.

Thus far, and particularly under McInnes' management, Premier seems to be doing a good job of managing its inventory, keeping it 'fresh', in the industry parlance.

It'll need to, with more and more overseas retailers looking to stake their claims here in Australia. Global fashion brands Zara, H&M, Topshop and others are arriving down under and are hoping to steal customers from Premier's stores.

While there is some customer overlap with some of Premier Retail's brands, the impact appears to be small, with some believing that the extra interest generated by the new arrivals is seeing more foot traffic in the incumbents' stores.

While at a high level, all fashion retailers compete with each other for the scarce consumer dollar, we don't think there's a¬†huge overlap between Premier's businesses and the would-be invaders ‚Äď and to the extent that overlap exists, we see no¬†reason why the company can't effectively compete.

Risks and When We'd Sell

Because of the nature of fashion and retail, this isn't a business without risk. We think we're being compensated for those risks with an attractive price, but if too many of those risks materialise to too great an extent, it'll be time to go elsewhere.

We'll be keeping a close eye on management, to make sure they continue to take actions that are closely aligned with¬†shareholders. As Solomon Lew's company Century Plaza is the major shareholder, we think that aligns our interests¬†nicely, and he'll be making sure Mark McInnes is making shareholder-friendly decisions ‚Äď but we'll be watching to¬†ensure that's the case.

Fashion is fickle, and Premier's diversity of brands is a strength, but if one or more were to enter a permanent downturn (without being replaced by another) that'd be cause for concern.

Lastly, we'll want to see the company's cash pile deployed intelligently when the opportunity arises. We're confident it¬†will be ‚Äď if it's spent at all ‚Äď but it's something we'll be scrutinising when the time comes.

Important, too, is something that's not a risk. Owning a fashion retailer ‚Äď even one with a diverse group of good brands ‚Äď exposes us to the vagaries of weather, fashion and consumer confidence. It's likely that Premier will have times¬†when one or more of its brands experiences falling sales or inventory issues.

The share price may ‚Äď or may not ‚Äď fall as a result. We're not expecting Premier to be flawless, but, like the share market¬†in general, to continue its generally upward trend over time.

Some brokers have downgraded expectations for the second half of this financial year. Those lower expectations may (or¬†may not) come to pass ‚Äď but in any event, we're looking to the long term.

The Foolish Bottom Line

Premier Investments is run by a couple of retailing old hands, who have a great deal of experience and expertise. That¬†expertise ‚Äď and the network of well-known brands and newer arrivals ‚Äď is available at a fairly lofty price of around¬†23.5 times 2014 earnings.

But if we back out its cash pile and consider next year's forecast earnings, the company is trading at just over 15 times 2015's profit. Also offering a fully franked dividend in 2015 that yields 3.6% (grossed up, that's equal to 5.2%) at today's prices, Premier Investments is one sale that's hard to go past.

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Last updated: 16 March 2015

This report was prepared by Scott Phillips and Mike King, and authorised by Bruce Jackson. This report contains general investment advice only (under AFSL 400691). Please refer to our Financial Services Guide (FSG) for more information. Employees and contractors of The Motley Fool, may have an interest in any shares mentioned in this free report. These interests can change at any time. The Motley Fool has a clear and concise disclosure policy.

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