If Myer’s proposed acquisition of Premier’s apparel brands was to go ahead, analysts at financial research firm Citi believe the combined group could benefit from better buying terms from scale and Premier’s product expertise.
Under the proposal, Premier’s five apparel brands - Just Jeans, Portmans, Dotti, Jay Jays and Jacqui E - would be acquired by Myer for shares proportionate to both businesses' operating profit.
The new Myer shares issued to Premier, along with its current Myer stake of 31.8 per cent, would be distributed to Premier shareholders.
In a note to investors, Citi analysts estimated a circa $25 million of potential earnings benefit if there was a five percentage point uplift in Myer’s private label apparel gross profit margin.
“Total potential synergies could add up to at least $50 million, factoring-in other synergies that we’ve quantified,” analysts wrote, who are predicting a $36.00 target price for Premier.
According to the note, Citi analysts estimate that private label apparel represented around 15 per cent of Myer’s FY23 sales - or around $500 million.
“Thus, for every 1 ppt of private label margin expansion, the group could see ~$5 million of earnings upside, all else being equal.
“We think better supplier terms owing to greater scale of the combined group could see at least 5 ppt of private label margin expansion or ~$25 million of earnings upside.
“The opportunity could be more material than this, however. We estimate Premier apparel GP margins to be ~58% vs. Myer private label apparel GP margin of ~40-45%. The margin gap represents the potential upside.”
This means an at least $25 million of earnings uplift, around $10 million of synergies from placement of Premier products as Myer concession, at least $7 million of synergies from distribution centre consolidation in West Melbourne, as well as head office and other cost reductions - totalling $50 million.
“Premier represents a unique opportunity for holders to participate in growth opportunities from international rollout of Peter Alexander, as well as potential earnings upside from various synergies through its holdings in Myer.”
The $25 million potential uplift takes into account that apparel sales make up 58 per cent of Myer’s total revenue. Of this, a quarter was private label.
Citi analysts estimate gross profit margin for private label apparel to be between 40-45 per cent, basing this on three key assumptions, including a 43 per cent gross profit margin for home and entertainment products, a 40 per cent margin for beauty and 30 per cent margin for third-party apparel and concession apparel.
Analysts also estimate that the gross profit margin for Premier’s apparel brands to be around 58 per cent. This is based on the assumption that Peter Alexander’s gross profit margin is at 70 per cent, while Smiggle is at 61 per cent.
“The size of the opportunities would then be the gap between PMV apparel’s 58 per cent GP margin and Myer private label apparel’s 40-45 per cent GP margin.”