More of Premier's future upside wired to 'Smiggles' offshore expansion

What's particularly pleasing about Premier Investment's (ASX: PMV) stellar first half result was that like-for-like sales across all seven of its brands – including Peter Alexander, Just Jeans, Jay Jays, and Portmans – and gross margins, were all up despite a weaker Australian dollar. 

Included within the retail conglomerate's first half result for the six months to January 30 – arguably one of the highest quality results ever – was a 90.7% rise in earnings before interest and tax (EBIT), total sales up 15%, like-for-like sales up 6.9%, and net profit up 26% to $71.5 million.

Online sales across the group were also up 48%, outstripping the pace of online sales by rivals in the broader market. 

The company's brains trust, including chairman Solomon Lew and former David Jones boss, CEO Mark McInnes have proved convincingly that they're committed to investing for growth, with 244 capital investment initiatives alone in the latest half year and a total 37 new store openings.

But as good as the result was, what's directly responsible for capturing the market's imagination is the brilliantly executed domestic and international expansion of the company's flagship brand, colourful stationary chain Smiggle – which saw global sales up 46.5% after adding 22 stores, including 18 in the UK.  Premier plans to repeat the early success of Smiggle in Australia in Britain and aims to have 70 stores open in the UK by July and 100 by Christmas, and 200 Smiggles stores open and sales of $200 million-plus annually by 2021.

Much of the ongoing success in the UK relies on meticulous care in selecting the right sites, and a disciplined approach to labour, rents and inventory management.

Beyond the UK, there are also plans to grow its Asian footprint, and another 50 (Smiggle) stores have been earmarked for Hong Kong and Malaysia within five years, with the first of these expected to open in April and May.

Smiggles aside, the other star performer within the company's stable of brands was Peter Alexander – with total sales growth of 22.5% – which also has the biggest proportion of online sales of any of the Premier Investments retail brands.The Peter Alexander brand is expected hit the 100-store mark, including concessions, by mid-2016, and there are plans to open stores in other airport locations after success with an outlet at Brisbane Airport.Meantime, Just Jeans, Jay Jays, Jacqui E and Dotti reported like-for-like sales growth, while Portmans achieved sales growth of 18.9%.

Given the degree to which the company managed to substantially beat consensus forecasts ($63.9 million) at half year, analyst were quick to raise its earnings forecasts for the next few years by 6-10%, and the 12-month target price on the stock are now as high as $17.40.

Admittedly, the stock is still trading at around a 5% discount to a target price of $17.40, but having risen by around a third since trading at $12.43 on 8 February, shares are not cheap, with a 2016 P/E multiple of around 24 times.

The trouble for would-be investors considering entering at current piece levels is that share price momentum may be unsustainable in the short term. Owing to the nature of its business, and the traditional skew towards the Christmas trading period, growth momentum is typically softer during the second half.

With the company's brands highly exposed to fickle consumer sentiment, the stock's fortunes are increasingly wired to offshore markets, and there's talk of the Peter Alexander brand following Smiggles offshore.

Much of the stock's future growth upside is embedded in the international expansion of Smiggles, and there are plans to increase the Smiggle network from 188 stores to around 470 stores over the next five years.   

Given that Smiggles is regarded as a category-killer brand with limited 'true' competition, it's likely to stock will continues to be re-rated on the strength of its rollout throughout the UK, Asia and potentially Western Europe.

The stock has one of the best investment grade balance sheets, with a long-term funding surplus of $518 million, and excellent earnings per share (EPS) growth is forecast from $0.67 in 2016 to $0.75 in 2017 and $0.85 in 2018; and a forecast dividend yield of 2.91%.

The stock could come under some share price weakness if shareholders start taking profits.

Investors need to enter the stock with a long-term horizon, and any price below $16 would make for a more comfortable entry point.