- Super Retail delivers standout result
- FY12 trading has also started solidly
- Improved value implies upside, ratings upgraded

By Chris Shaw

Super Retail Group ((SUL)) has managed to buck the weak retail trend in Australia, delivering a 46% increase in FY11 net profit to $55.6 million. The result was helped by better than expected gross margins, which more than made up for a 52-week trading period compared to a 53-week period last year.

According to Credit Suisse, the improvement in gross margins was the result of improved trading terms, supply chain efficiencies and better purchasing rates. The improvement carried across all the divisions of Super Retail and, as Morgan Stanley notes, came despite the tough retail environment.

The solid performance has to date carried through to FY12. UBS notes like-for-like sales for both the Super Cheap Auto and BCF divisions are up 5% in year-to-date terms for 1Q12. Growth is expected to continue in both divisions thanks to extensions to existing product categories and further improvements in sourcing.

The result was a standout in UBS's view, as it highlighted strong brands and good momentum from the product sourcing strategy of management. The other plus is a strong balance sheet, as UBS sees this as allowing for further expansion to product categories. Possible examples for the broker include the sports/fitness and hardware/tools sectors of the market.

Post Super Retail's full year result market forecasts have seen some adjustments, UBS increasing its earnings per share (EPS) forecasts by 3-4% through FY14 but both Goldman Sachs and Credit Suisse have trimmed estimates by a similar percentage.

Consensus EPS forecasts for Super Retail according to the FNArena database now stand at 51.6c for FY12 and 58.4c for FY13, which suggests solid growth from the result of around 43c delivered in FY11.

Looking ahead, Credit Suisse suggests apart from further growth in both the core Super Cheap Auto and BCF divisions, the Ray's Outdoor division is also expected to lift returns as ongoing synergies with BCF are realised. RBS Australia also expects better things from Ray's, as previous legacy issues with respect to inventory and stock levels appear to have been sorted out.

While Goldman Sachs suggests the market may be disappointed by the decision to retain the Goldcross business, losses for this division are likely to be reduced going forward in the broker's view. UBS agrees.

The revised earnings forecasts for Super Retail continues to suggest value in the stock, as Credit Suisse notes its forecasts imply a FY12 earnings multiple of around 12 times. Morgan Stanley is similarly positive, as along with solid comparable sales growth potential, Super Retail is also expected to deliver a meaningful expansion in store footprint in coming years.

Recent share price weakness has also factored into the views of RBS and UBS, both brokers upgrading to A Buy rating on Super Retail from Hold previously. This leaves Super Retail as rated Buy by five of the six brokers in the FNArena database who cover the stock.