Equity analysts at Morgan Stanley are claiming that Premier Investments’ plans to scale Peter Alexander in the United Kingdom is “unlikely to be successful”.
In a note to investors, the analysts claim the apparel market in the UK is highly competitive, while the nightwear subsidiary has little brand equity outside of Australia and New Zealand and its sister brand Smiggle’s offshore expansion has been mixed.
“Our view is the UK nightwear market is highly fragmented with no category killer,” the note read. “The top 10 players sell nightwear as part of a broader apparel offering, where nightwear is unlikely to be the priority. This suggests there is room for a brand with a differentiated and fashion-focused product, like PA, to disrupt the market.”
Closer to home, the analysts added that Peter Alexander’s AU/NZ growth profile is likely to slow over the medium term, given recent strong performance. The compound annual growth rate (CAGR) in sales has reportedly lifted by 16 per cent from FY19-24.
“However, PA has a strong record of beating consensus expectations,” the analysts noted.
Analysts identified upside risk, including new stores, larger format stores and comparable stores growth. They estimate an opportunity for 180-200 stores compared to 127 at FY23 end, with 25-30 per cent of Peter Alexander’s existing network to double in store size.
Speaking on demerging plans, with Premier working towards demerging Smiggle into a separately listed entity by January 2025, with a Peter Alexander shakeup also on the cards, Morgan Stanley analysts said while they expect dis-synergies, they are difficult to quantify.
“We include A$35m of reinvestment for operations, IT, finance, etc in our base case,” the note continued. “PMV has suggested potential dis-synergies are immaterial. This is supported by progression on the de-merger (why would major shareholder and Chairman, Solomon Lew break-up PMV if it didn't create value?).
“We expect the disclosure of any dis-synergies (and segment margins) to be a key re-rate catalyst.”
A few weeks earlier, Morgan Stanley analysts told investors it had lifted its valuation of Peter Alexander to $2.6 billion, calling the brand one of the highest-quality retailers in Australia.
“PA has been Australia's fastest-growing retailer over the past five years, increasing EBIT at +27% CAGR from FY19-24, on our estimates,” the note read. “This is almost 3x faster than the peer average of +10%.”
At the revenue line, Peter Alexander grew at a CAGR of 16 per cent, second only to Lovisa 23%.
The nightwear brand’s sales and operating profit is expected to moderate, however Morgan Stanley analysts said the brand has a strong record of beating expectations.
“We see scope for PA to deliver +10-15% earnings growth over the medium term,” the wrote, citing local and international growth.
“We think the market's perception of PA is likely to change as we get more disclosure from PMV as the demerger progresses.”