The S&P/ASX 200 Discretionary sector fell sharply on Monday, dropping 1.9% to a near one-month low following disappointing trading updates from Premier Investments (ASX: PMV) and Myer (ASX: MYR).
Premier had rallied approximately 23% over the past year, with those gains erased through a dramatic 23% single-day decline and continued weakness on Tuesday.
Premier announced reduced earnings forecasts for the first half of FY25, citing challenging retail conditions and persistent cost of living pressures. Key metrics for the 26 weeks ending January 25, 2025, include:
Total global sales to be in the range of $855-865 million or down 2.2% compared to the prior period
Australian sales were broadly flat year-on-year
Premier Retail's underlying EBIT to be in the range of $160-165 million or down 22.5% compared to the prior period
Apparel Brands business to deliver 1H25 sales in the range of $405-412 million and underlying EBIT between $31-35 million (or down 35% year-on-year at the midpoint)
Apparel Brands gross margin to be broadly flat against the prior period
How do these numbers compare to market expectations – Pretty bad.
Total global sales: 3% miss against consensus of $886 million
Premier Retail's EBIT: 20% miss at the midpoint vs. consensus $203 million
While Premier provided little detail, Morgan Stanley believes this downgrade was largely driven by higher promotional activities to stimulate demand, subdued performance in Smiggle and ongoing cost pressures
The average target price among 15 analysts covering Premier has been reduced by 2.5% to $33.73. Notable broker updates include:
Morgan Stanley retained an Overweight rating but cut their target from $39.50 to $37.50. The earnings decline was viewed as largely cyclical rather than structural. The analysts cited the company's proven track record and robust balance sheet as grounds for their continued bullish stance.
JPMorgan retained an Overweight rating but also lowered their target from $36.50 to $32.90. The analysts believe the expected rate cuts in the second half of 2025 will help drive an earnings recovery in the near term.
Goldman Sachs retained a Neutral rating and cut their target from $32.40 to $27.85. Their concerns centre on the underperformance of the Smiggle and Peter Alexander brands, questioning whether these challenges are structural or cyclical. They noted that cost pressures have further impacted earnings weakness, and while they project eventual recovery, they remain cautious on the near-term.
UBS retained a Neutral rating and lowered their target from $31 to $30. The growth potential in Peter Alexander and proven cost management were viewed as positives.
While these rating adjustments appear modest, they reflect substantial changes in underlying earnings forecasts. For instance, JPMorgan significantly reduced their retail EBIT projections — 18% for FY25, 14% for FY26, and 9% for FY27. Premier's stock continued its decline on Tuesday, down 3.0% to $26.93.
The trading update drove several retail stocks lower on Monday, including Accent Group (-6.3%), Universal Store (-3.5%) and Breville Group (-3.4%).
JB Hi-Fi (ASX: JBH) decided to wait until Tuesday to begin showing some cracks, down 1.7% at the time of writing. The narrative behind JB Hi-Fi and its extraordinary run (up 58% in the past twelve months) should resonate with most retail stocks.
Earnings went backwards in FY24, with EPS down 16% year-on-year
The earnings dip was better-than-feared and beat market expectations by 3.7%
The share price run in 2024 was driven by multiple expansion, with its price-to-earnings ratio soaring from approximately 13x to 23x
This compares to JB Hi-Fi's historical average price-to-earnings of around 13x
Goldman Sachs projects modest earnings growth of 1.4% in FY25 and 3.6% in FY26
We're at a point where market expectations for retail earnings are relatively low but earnings need to start doing some heavy lifting after a prolonged period of multiple expansion.
Premier's trading update might raise some concerns that trading conditions in the second half of 2025 were more challenging than expected, driven by higher promotions, weaker margins and ongoing inflationary pressures.
While companies like JB Hi-Fi demonstrate strong cost management and maintain robust balance sheets, their elevated valuations leave little room for earnings disappointments.
Looking ahead, Westpac's latest consumer sentiment report for January highlights how "the consumer mood has soured for two months in a row and remains on the pessimistic side."
"However, sentiment is still less negative than a year ago and some components suggest that consumers expect things to continue to improve from here," the report said.
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