Super Retail Group Limited (SUL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Super Retail Group's Financial Year '21 Half Year Results Presentation. Today's speakers will be Mr. Anthony Heraghty, Managing Director and CEO of Super Retail Group; and Mr. David Burns, CFO of Super Retail Group. [Operator Instructions] Please note that today's call is for investors only. Media wishing to obtain access to management should contact Kate Carini, whose details appear at the bottom of today's ASX announcement. I would like to hand over to Mr. Anthony Heraghty to begin today's presentation. Please go ahead.

Yes. Thank you, and welcome, everyone, to Super Retail Group's Half Year Results Presentation. Joining me this morning is our Chief Financial Officer, David Burns. Good morning, David.

Good morning, everyone.

Okay. So in terms of the structure of today's presentation, I'll talk through some of the financial and operating highlights of the period before discussing some of the opportunities we see to leverage our loyal consumer base, grow our 4 core brands and to create our long-term shareholder value. I'll also talk about divisional performance. I'll then ask our Chief Financial Officer, David Burns, to provide more detail on the full year financial results. And then finally, provide you with a brief overview of our corporate strategy, together with a trading update for the first 7 weeks of the second half. There will obviously be an opportunity for you to ask questions at the end of the call. If we just go to the presentation, Slide 4, and we go to the summary. We're pleased to report that the group has delivered a record first half result, underpinned by strong top line growth, high gross margins and disciplined cost management. But with no doubt and there could be no question that unprecedented consumer demand was the key drivers of this result. However, it was the group's omni-retail business model that will enable us to successfully capture this demand despite the ongoing challenges of COVID, lockdowns and the like. This is in the period when our online sales grew by over 87%. The group was able to deliver strong operating leverage, therefore demonstrating the profitability of our online sales and more importantly, the scalability of our online omni-retail platform. As we enter the second half, the group has a conservative balance sheet with no net debt and a healthy cash position. This leaves us well placed to reinvest in our 4 core brands, grow our market share. Turning to Slide 5. Group sales increased by 23% to $1.78 billion. Pleasingly, this top line growth translated into 122% increase in EBIT to $256 million with group EBIT margins up 6.4% to 14.4%. Our underlying NPAT increased by 139% to $177 million, while our statutory NPAT increased by 201% to $173 million, reflecting a significant reduction in below-the-line adjustments. Online sales grew by 87% to over $237 million and now represents over 13% of group sales. With 1 million increase in the number of active customers in the last 12 months, so to say with a 700,000 increase in the number of active online customers in the last 12 months and an average online transaction value of 170% higher than our average in-store transaction value, there's a significant opportunity for the group to leverage this shift in customer spending patterns towards digital to profitably grow our business. And with a net cash position of $400 million, we can continue confidently to execute our strategy to both capitalize on current elevated levels of consumer demand and reinvesting long term to reinforce our market-leading positions in our key categories. If we turn to Slide 6. We want to call out some operating highlights and really underpins the capability of both our systems and our team to successfully manage this unprecedented uplift in the volume of customer orders and transactions more generally flowing through our business. We grew our number of active club members during the period by 10.9% to 7.1 million. They are active members who have shopped with us in the last 12 months. These active club members now represent 62% of group sales in the first half and increasingly represent a source of sustained competitive advantage, which will help to underpin the resilience of our earnings going forward. The group fulfilled over 2 million online orders during the first half. It's worth noting that despite the impact of COVID disruptions on store trading and foot traffic, Click & Collect sales increased by 74% to $108 million. I don't think anyone would predict an extraordinary surge in customer demand that we saw during the second half, and the statistics on Slide 6 will give you a sense of that scale of that volume uplift we successfully managed across our supply chain to not only ensure that stock was on shelves, which was a challenge, but customer orders were successfully fulfilled. And from a team perspective, we were delighted to award over 5,000 team members with a cash payment of up to $5,000 to thank them for their extraordinary efforts in serving our customers and looking after each other while meeting the unique challenges of COVID-19. On Slide 7, we illustrate our ongoing commitment to social, ethical and environmental initiatives that benefit our team, investors, customers, trade partners and the communities in which we operate. During this period, we continued to make good progress towards our objective of adopting a sustainable and ethical approach to our business operations, and some of these key achievements are set out on Slide 7. We continue to invest in measures that keep our team and customers safe during the COVID-19 period, including contact-free Click & Collect. Pleasingly, our continued focus on safety reporting and accountability has helped reduce -- helped to sustain our safety measures. Moving on to Slide 9. We sort of touch and go a little bit deeper on our online performance. The COVID-19 period really has reinforced our conviction that our omni-retail strategy is the right one, and that's because it gives us the flexibility to quickly adapt to changing consumer preferences and pivot our focus on meeting this elevated demand in our online channels and also within our store channels. Over the past 4 years, online sales have grown by a CAGR of 64% and in the first half, as I mentioned, reached over $230 million, which is more than 30% of total sales. Group investment in digital and omni has benefited all our brands, and this is reflected in this online performance. When we go to Slide 10, we see that, again, despite this COVID disruption to stores, 93% of sales and 45% of online sales required or involved our customer visiting a store. The store network is just as important to our omni promise as it ever was. Home delivery represents 55% of online sales, which is slightly elevated compared to historic levels due to the shutdowns and the like. And Click & Collect was still 45% of online sales and we would expect that contribution to normalize upwards over time. On Slide 11, we provide a bit more detail brand-by-brand in our growth in customer numbers, customer satisfaction and club members as a percentage of total sales. We're pleased with the double-digit growth we saw in active club members of our 3 largest brands, noting that Macpac, of course, was impacted by store closures in Auckland and Melbourne and restrictions on international travel and the like. We are broadly happy with our NPS scores, although we note that the Rebel NPS score was impacted by delivery times and availability of inventory for high-demand products like gym equipment and -- during the peak of the pandemic. Nonetheless, we accept the challenge and will continue to do better. Group-wide active club members now represent more than 60% of sales. And we think that's a big opportunity, and we'll touch on that later in the presentation. Onto Slide 12. This slide really talks what we think is one of the big opportunities available to the group, which is leveraging that loyal member base. We saw significant growth in the last 12 months, 9% to 7.1 million members, 62% of sales. And we've seen this trend in the past year also mirror in terms of the acceleration of online purchasing within the active club member base. As evidence of that, the number of active club members purchasing online in the last 12 months has almost doubled to 1.4 million. A key priority for our business is the quality of our digital engagement. So we have worked through suspending some traditional marketing and pivoting to digital. That's been a valuable exercise for us during the pandemic. It has meant that we're able to better target more efficiently and more effectively these club members. But more importantly, we are getting a much deeper understanding of shopping habits with our members, which provides insight into pricing, promotion and also our ranging decisions. We currently have research and training to determine even more defined behavioral segmentation and where that will feed into our decision-making process of how we will -- will feed into the process of us reviewing our loyalty club member propositions across all 4 brands. Going to Slide 13. Some of you who have been familiar with our stock would have seen this chart before. For us, it's key because it shows over the last 4 years that our active club member base has grown by 48% where store numbers have only grown by 11%. We think this is important because we can scale our business by growing our customer base and capturing an improved share of customer wallet without significant investment in the physical store network. Then we can effectively scale our business and deliver the benefits of that operating leverage to our shareholders. On Slide 14, one of our key focus has been our 4 core brands, and this slide outlines some of the key initiatives we expect to undertake in the second half. I won't touch on all of them, but I wanted to call out just a few. In Supercheap Auto, we continue to see strong demand for the do-it-for-me category, especially within fitment, and we're intending to expand dedicated service areas in stores to provide more fitment options to more customers. In Rebel, our rCX store in Parramatta has been a very pleasing success. We intend to roll that out -- format out to 4 new locations as well as taking insights from that format in terms of specialized in-store worlds of format for [ mastering ] categories of basketball, football, running, kids and training more broadly across our store network. In BCF, we successfully tried -- trialed the introduction of high growth local and regionally relevant ranges in areas like North Queensland, and that has been incredibly successful and we'll apply that to how we'd approach to other regions. Finally, for Macpac, we are going to range the Macpac products in over 150 stores in BCF and Rebel this winter, which, in the case of BCF, has helped address the seasonality skew of earnings in that business. Slide 15. We wanted to sort of set out what we believe are 3 opportunities that we believe will deliver long-term value for our shareholders beyond this pandemic period. The first one is gross margin. Clearly, as we've dealt with challenges in availability of inventory, we have reduced our promotional frequency and depth. But underneath that, we'll be working tirelessly with our promotion and pricing analytics teams to look for structural improvement. And we're confident of some of the achievements that team's achieved. We've also worked through a very clean inventory position and gives us a strong gross margin base to work from as well as sustained sourcing benefits through our China sourcing team. The second big opportunity is online profitability harmonization. We've seen, as we called out, sustained Click & Collect penetration. And Click & Collect is good business for us. We also see when we look at a transaction online, whether it's delivery or Click & Collect, a higher average transaction value and a higher gross margin dollar per online order. That means we've -- combined with the ongoing reduction of delivery costs through our order management capability we switched on during this period and the alignment of pricing and promotions across channel, we believe we are very close to achieving profit contribution harmonization across channels. It's an exciting development. And finally, BCF sales intensity and the ability to sustain it above that COVID-19 period is critical. We've got an increased customer base of 1.7 million active club members, far greater than we had when we went into the pandemic. We've trialed small-format stores in Victoria and Queensland successfully, and we're excited by their prospects. We've talked about Macpac entering the BCF range this winter as well as successfully including exclusive ranges within BCF, which is starting to provide a good competitive shield in terms of protecting its share. Moving to Slide 17 and -- sorry, moving to Slide 19 as we get into the segments in more detail. We'll start with the Supercheap Auto. Supercheap Auto, which represents 39% of group EBIT, performed very well during the period. Sales increased by 20.2% to $662 million with like-for-like sales growth of 19.6%, driven by both transaction growth and increased unit per sale. Like-for-like sales growth was achieved in all categories with outdoor and accessories delivering the strongest growth. In-car tech, 4-wheel drive and outdoor, paint protect, car dealing -- detailing and safety and comfort were the strongest-performing subcategories. Segment EBIT increased by 81.7% to $104.1 million and segment EBIT margin improved by 530 basis points to 15.7%. Online sales grew by 46.1% to $54.2 million. Rebel, over the page, represents 37% of group EBIT and had a strong first half. Sales increased by 17% to $624 million off the back of strong like-for-like sales growth. Like-for-like sales growth was achieved in all categories with fitness and hardgoods delivering the strongest customers -- strongest growth as customers in various states of lockdown scrambled to buy home gym equipment like weights, yoga mats, boxing gloves, skipping ropes, you name it. Pleasingly though, apparel and footwear sales accelerated during the half as the COVID-19 sales -- as COVID-19 restriction eased. Limited stock availability did impact sales, but this was, of course, offset by higher gross margin due to the reduced promotional activity. Segment EBIT increased by 85.5% to $99.6 million and segment EBIT margin improved by 610 basis points to 16%. Online sales grew by 102.1% to $119.9 million. BCF was a clear standout performer in the first half. Total sales increased by 50.9%, driven by extraordinary strong like-for-like sales growth, reflecting a material uplift in consumer demand as COVID-19 restrictions eased and domestic tourism and leisure activity increased. Like-for-like sales growth was achieved in all categories with camping, boating and apparel delivering the strongest growth. Camping accessories, watersports and 4-wheel drive were among the best-performing subcategories. Segment EBIT increased by over 400% to $62 million and segment EBIT margin was 14.5%. Online sales grew by 113.1% to $50.5 million. This is a pleasing result for BCF, which demonstrates the team's ability to take advantage for what was unprecedented demand. BCF has got a strong brand. We know that. It resonates with our customer, and this is evidenced why there's 1.77 million active club members, which now represent a significant 84% of BCF sales. Obviously, appreciate that BCF has benefited from a unique set of circumstances in the last 6 months. However, we remain optimistic about our ability to leverage its brand strength and the customer base that we've created to take up -- take advantage of uptake in participation in this category. Well done, BCF. Onto Macpac. Macpac brand was the most impacted by COVID-19 due to closures in key markets of Melbourne and Auckland and obviously because of the impact on restrictions on international travel and, therefore, thermal and insulation sales. Despite a 5.3% fall in sales, segment EBIT increased by 52.2% to $3.5 million and segment EBIT margins increased by 210 basis points to 5.6%. There are 3 positives coming out of this performance in the first half I'd continue to draw your attention to. Firstly, in its home market of New Zealand, like-for-like sales actually increased by 15.6% despite COVID-related store closures in Auckland and decreased international tourism and travel. Secondly, excluding the impact of store closures in Melbourne and Auckland, Macpac like-for-like sales increased by 6%. And then finally, whilst thermal sales were down, the business delivered a very strong performance in tents, backpack and accessories following the successful launch of our summer family camping range. I also note Macpac has returned to green in terms of positive like-for-like sales growth in the first 7 weeks. Now I would like to pass over to David Burns to talk about the financials in more detail.

Thanks, Anthony. On Page 23, group unallocated result of $13.2 million includes the cost of the repayment of JobKeeper that we received from the government this year. The decision to place to -- list to unallocated is based [ on the betting ] corporate decision. Macpac has made [ 10 of the ] top-up payments during this period to ensure that we maintain a minimum $1,500 of fortnight threshold for all team members. And that has been -- and the business has been significantly impacted by the Melbourne shutdown. The result also includes higher costs for [ daily ] insurances and management incentives. This year, [indiscernible] is fully allocated to brands. On Slide 24, turning to the balance sheet. Maintaining inventory levels has been a challenge in this current high-demand environment. Each brand is working hard to manage out-of-stock levels, which remain elevated. We have benefited from acting quickly in May 2020 to increase our stock purchasing, and we felt that when we saw the strong lift in demand as we came out of shutdown. The capital-raising provided the group with the financial support to take a higher risk on stock purchasing, which we have seen in the sales result now. Stock in transit, the $43 million, is almost double the prior year as higher purchasing activities push up against constrained shipping port and transport suppliers that are at capacity. We are fortunate to have our own supply chain capability that provides more flexibility to manage this more dynamic environment. Inventory levels need to be higher to support the increased trading activity. We have increased our [ open to buy ] and we are very focused on managing risk in this area to maintain the appropriate balance. Fortunately, much of the inventory we hold is nonperishable and mostly not linked to [ a refresh in ] cycle. We expect the inventory levels to have rebalanced by March with some exceptions taken into quarter 4. Net inventory investment has benefited from increased stock turn and extended payment terms, which we agreed back in March 2020 and have ceased in December 2020. PP&E investment is reduced due to lower capital expenditures in the period as the group poured the capital programs in late 2020 until the quarter to return to normal levels. There's approximately $10 million of increased depreciation and amortization costs in the period. It was a result of acceleration of depreciation of [ certain exempts ]. The strong net cash position is impacted by the Christmas trading period, which is always seasonally higher and extended payment terms in H1 and H2 and, obviously, the elevated demand. Turning to Slide 25. Normalized EPS has increased by 110% and the Board has declared a dividend of $0.33. And we confirm our dividend payout ratio will be 55% to 65% for the full year. As expected, all key metrics are excellent. The improvement in the Australian dollar will merge the group's results over the next 12 to 18 months as our hedge book [ will provide ] to current levels. Currently, it's averaging 0.737 to the U.S. dollar. Our hedge policy provides us cover on the downside, but it also dampens responses to the upside. Turning to Slide 26, group cash flow. Operating cash flow for the period is excellent with strong cash conversion due to seasons come to period demand levels in payment terms as outlined earlier. And as noted, our capital expenditure levels are lower due to the slow start in quarter 1, but we are now scaled back to full activity for the balance of the half and the rest of the financial year. I'll now hand back to Anthony to continue the presentation.

Yes. Thanks, David. So Slide 28 and 29 talk to our corporate strategy, which is outlined at our Investor Day in September 2019. Super Retail's strategy has proved to be successful during the intervening period, notwithstanding the impact of bushfires and now a pandemic. And given the limited time, I won't talk to this in detail, but I'll continue to make a few high-level points. So firstly, on this platform of growing our core 4 brands. Since the beginning of my tenure, we've taken steps to remove noncore businesses, which led to our decision to close businesses like Infinite Retail and Auto Guru. Following the equity raise that took place in July of 2020 and recent strong trading, the group business is in a strong cash position. However, our focus remains on reinvesting in these 4 core brands and pursuing organic growth opportunities. In terms of leveraging our closeness to the customer, we have spoken today about the loyalty club review we commenced across all 4 brands, and that's making good progress. In supply chain, we've already started to see the benefits of our overseas sourcing project flow through and 2 significant software solutions have been implemented, namely our online order management system phase 1 and our international freight system as well. Our business simplification program is well underway. We're happy with the progress we've made on our information system's 5-year strategy and migration to cloud-based solutions. And finally, in relation to omni-retail execution, we've already seen some success in key digital acceleration elements, including web chat, which has had a positive impact on conversion rates and average order value. And the overhaul of our checkout flow to make transactions more seamless, all [indiscernible] progress. Slide 31, trading update. Pleased to report that like-for-like sales growth for the first 7 weeks of the half of -- sorry, we'll start that again. I'm pleased to report that group like-for-like sales growth of 25.2% as at week 33. Strong momentum for trading is to continue, particularly in BCF, with group like-for-like sales of 30.5 in the first 7 weeks of half 2. Each of our 4 core brands have delivered positive like-for-like sales in this period, and that is despite the total closure of our stores in Western Australia in week 5 due to the COVID lockdown. The group remains well positioned to benefit from positive consumer sentiment and elevated demand in the domestic outdoor, leisure and travel sectors. Current levels of consumer spending are expected to moderate when government stimulus is phased out and international travels restrictions ease. About the group's strong balance sheet, 7.1 million active club members and leading market positions in our categories mean we are well placed to execute our strategy and to grow our market share. The group expects to return to normal levels of promotional activities in the second half as inventory levels are restored. Second half operating expenses will reflect a catch-up on projects deferred during COVID-19 and increased reinvestment in the business. Finally, I can confirm our guidance for CapEx for this financial year of $100 million. Thank you. And I would now like to hand back to our operator for questions.

[Operator Instructions] Your first question comes from Mark Wade with CLSA.

Congrats on the results. Well done. Just trying to think a couple of years out from here. I mean what's making this a better business than compared with pre-COVID, right? So what -- I know you touched on the club members have increased, and I guess there's increase in participation rates, but can you elaborate on any other aspects of the business that you really feel like is giving you the confidence such that the business should be capable of making more money in the future than it has done pre-COVID?

Yes, Mark. I think that slide, Slide 15, really tells that story. So you touched on one. That club member base is quite significant not in terms of just at scale, but the way we can operationally leverage it, whether it's just simply understanding purchase patterns far deeper than we -- you can through a single transaction. So that impacts the way we think about ranging, pricing, promotion. It also talks to how we think about the store network because we can see how those segments actually engage with channels. So can't understate -- or can't overstate, frankly, of how big a deal that is. The loyalty program that we're underway with now, which we called out as a program we're working in our investor meeting, we're getting to the -- more of the pointy end of that now. And that gives us that carrot and stick with our club members to ensure that we are protecting their custom with us over the long term. So clearly, the club activity is significant. The second one I would call out is the online piece. So we are keeping pace with this online shift. We are seeing in our numbers, we are gaining share against our direct competitors online. We're able to see -- we are starting to get very confident around profit harmonization across channels, whether it be delivery, Click & Collect and in-store. That's critically important for us. So the fact that we can grow with this online burst, which we think is sustained well beyond COVID, is important. And probably the last one I'd sort of point out is some of the formats that we've trialed during this period, particularly the rCX format within Rebel, the small formats that we've trialed within BCF and the click -- not the Click & Collect, the services extensions that we talked about for Supercheap, that's probably an arrow in our quill that we didn't think was there 18 months ago. And I think as we drove some of these new formats, we've been quite encouraged by their performance. From a post-COVID period, we think there is opportunity to sort of roll some of those programs out across the wider network.

Okay. That's quite encouraging. And just looking at Macpac and BCF and having an overlapping range -- or including Rebel actually, having an overlapping range, putting Macpac into those other [ stores ], is there a risk that you just [indiscernible] customer appeal or that brand and how they understand what those brands stand for as much the same way as [ Rave ] didn't really do anything for BCF?

Yes. I think it's slightly different because Macpac at its heart is a product brand. Its core is a range of apparel and equipment. And obviously, with that segmentation data we've got, we can sort of see that where there is similarities and where there are differences. So I think we're much more aware of those potential traps. The way I sort of think about it is though, for Macpac, it gives a significant accelerant in terms of access to the market and doors. So to simply -- just think about it from a pure packaged goods or FMCG or apparel perspective, to have access to 150 doors instantaneously just gives you significant acceleration in terms of brand awareness for Macpac and availability for customers. And so that, we think, is actually a good step-up for Macpac as well as providing good rounding of ranges for the Rebel and BCF business.

Your next question comes from Andrew McLennan with Goldman Sachs.

Yes. Well done on the results. Just a quick one in relation to the dividend first. You mentioned the 55% to 65% payout ratio is going to be maintained full year. So it looked a little bit weak first half, but it's just the timing issue there. You're going to put more of the dividend in second half. Is that reasonable?

Yes. We've traditionally always held a higher second half than the first half dividend.

Yes. Yes, okay. And just as a reminder, obviously, the bushfires impacted the business this time last year but also through to Easter. Can you just quickly summarize your expectations as best you can in terms of how the different brands are positioned through the Easter period given that backdrop?

Yes. I mean, look, it's -- I think you've got to extend that question, Andrew, through to May and June. So if we just retrace history a little bit, you effectively had an Easter lockdown where Easter was rendered [ which was enabled ] one of a better description. So that's clearly impacted the outdoor businesses at the time. But at the same time, as we go into May and June lockdown hard last year, you had a little bit of doomsday prepping that impacted Supercheap and BCF. And then you also had a grand -- everyone decided to have a home gym at that period. So I think you've got to combine the shutdown of April with the uplift of May and June as well as the fact that during that May and June period, the business considerably reaped costs, whether it be marketing investment, whether it be store wages, et cetera, et cetera, just adding shutdown. So it's -- I think we've got to think about that hardgoods suggestion, that whole picture for that quarter, not just Easter, but Easter missed last year, absolutely.

Yes. Yes, good. And if I could ask one, just speak more final one. Just around freight costs, we're hearing some -- it's not new, but ongoing negative feedback around costs. Is that a significant impasse for your sales? Or is that offset by FX gains?

No, it's a problem. So shipping is tough. Getting access to equipment is tough. And it's not a little sign of it getting worse in the short term. We've got some offset there in terms of promotion being not as intense in gross margin really, but the global supply chain is under pressure.