Discretionary Retail Outlook for 2018 - Sam Haddad

With consideration to the challenging domestic macro backdrop and the increasing competitive environment (with Amazon and other incoming international competitors), we prefer retailers with the following key attributes:

• Leveraged to global growth opportunities;
• Elements of scalability on a global platform;
• Preferably own their own brands;
• Preferably own differentiated brands or have a unique market position;
• Are market leaders in their category;
• Strong omni-channel capability; and
• Defensive attributes.  

Amongst the retail stocks we cover, we believe LOV and PMV meet these key investment themes very well. 

Lovisa Holdings Limited (LOV)

Lovisa Holdings is a leading specialist fast fashion jewellery retailer that is strategically focused on the affordable jewellery segment. Our positive view of LOV is supported by the company’s strong long-term earnings growth outlook underpinned by significant global store rollout opportunities - with LOV recently entering the UK, Spain (in pilot) and the USA (in pilot). 
We believe LOV is well placed to execute on its international growth plans given a number of attractive business attributes, including LOV’s vertical business model that supports high gross margins and brand control, compelling store metrics with high sales intensity and short average payback period (all regions less than 9 months), fast supply chain (only 8-10 weeks from product development to being in-store), and a regionally adaptable product range. On the domestic front, we believe LOV has defensive attributes against macro headwinds as customers are able to treat themselves without putting pressure on their budgets (given LOV’s low dollar value transactions). 

Premier Investments (PMV) 

Premier Investments is an investment company whose major investment is in discretionary retailer Just Group. Just Group operates specialty retail brands Just Jeans, Jay Jays, Portman’s, Jacqui E, Peter Alexander, Dotti and Smiggle. 
Our positive view on PMV is supported by the company’s strong long-term earnings growth outlook underpinned by three key growth pillars: Smiggle’s global expansion (the primary growth pillar), Peter Alexander and online. We note these growth pillars are higher margin and therefore a tailwind to group margins. We see the current cyclical softness in apparel as an opportunity to build exposure to PMV’s Smiggle global growth thematic. The growth opportunity for Smiggle is significant, with the brand only now entering Continental Europe and yet to enter North America. Management has guided for Smiggle annual sales to exceed $450m by FY20, which represents a significant doubling vs Smiggle’s FY17 sales.

Propel Funeral Partners (PFP)

Propel Funeral Partners is the second largest provider of death care services in Australia and Zealand. PFP’s portfolio footprint comprises 99 locations including 21 crematoria and 5 cemeteries (including the Brindley Group acquisition expected to be completed by 31 March 2018). Based on a proven growth strategy, the leadership of an experienced management team and the backing of a strong balance sheet (pro-forma end-FY17 net cash of ~$50m), we believe PFP is well positioned to lead and drive further industry consolidation. Both markets in Australia and New Zealand are ripe for consolidation with a long tail of independently owned operators. PFP also stands to benefit from the compelling fundamentals of the death care industry, including the positive long term trend in the number of deaths underpinned by an increasing and ageing population, the industry’s highly defensive attributes and the relatively high barriers to entry.