Cashed up Solomon Lew’s Premier Investments in the box seat for growth, and deals

Solomon Lew’s Premier Investments is primed for more growth: internationally, logistically, organically and through bolt-ons. And yes, it may even be ready for a crack at Myer.

With a market capitalisation of $3.8bn, Premier is over nine times the size of Myer. So the media obsession of will he, won’t he on Lew mounting a takeover for the department store seems almost misplaced. Yet there are other assets for the taking in a market where underperforming retailers look threatened by cost of living pressures.

Premier shares leapt up 14.6 per cent on Thursday after Lew and the company’s chief executive, Richard Murray, coloured up the annual results. These came in above expectation with a record $1.5bn in sales and good momentum into this year.

In the 12 months since arriving at JB Hi-Fi, Murray has steered Premier through the end of Covid-19 shutdowns and war-induced supply chain issues, swapping TVs for fashion with apparent ease. At the end of it, the board announced an ordinary dividend and a special dividend totalling almost $200m.

Of the seven brands – Peter Alexander, Smiggle, and five in apparel – the jewel is now the pyjama shop, with sales over half that of apparel at $428.5m.

Yet it is Murray’s management of gross margins that fortified the business.

Premier continued managing up of its landlords brings flexibility and negotiating power. Three-quarters of its global store network is in holdover or with leases expiring within 12 months.

Premier Investments chairman Solomon Lew and boss Richard Murray at the Smiggle store in the CBD of Melbourne. Picture: Ian Currie

In contrast, both Myer and David Jones struggle with long-term lease agreements. This is one of the reasons Lew believes a merger between Myer and David Jones will never happen.

Premier boasts two high value properties, the Melbourne retail HQ and land at Truganina where the company has its own distribution centre. Truganina has given Premier much more control over inventory management, and there is still room to expand on site. The industrial property value itself, as Murray notes, is a goldmine.

Premier’s balance sheet is ship shape. “We have managed our stock position very well. We have no trading debt at all as such,” says Lew. “We are financially very strong and potentially could take advantage over the next period of opportunities that we may have been looking at in the past, and we may proceed in the near future.”

The company’s major investment is a 25.6 per cent stake in Breville valued in July at $760m. Global jitters have pushed Breville shares down over 40 per cent this year, but the business is performing strongly.

And the 19.9 per cent stake in Myer was valued at $75.9m. Last month, the company increased its stake to 23 per cent.

True to form, Lew is keeping the market guessing on a new target buy. As first reported in The Australian early this year, his private business ran the ruler over a struggling David Jones – which South Africa’s Woolworths would dearly like to offload.

But Lew has seen more value in Woolworth’s Country Road Group in the past. In any event, David Jones screams Sydney, rather than Lew’s home town of Melbourne.

With a 23 per cent stake in Myer, Solomon Lew is making a renewed push for Premier director Terry McCartney to join the department store’s board at its upcoming annual meeting.

Lew says he is waiting to see how things play out, but that the increase in the Myer shareholding averages down Premier’s buy in cost of the long-time underwhelming investment. At this point, he is happy with the shareholding.

The focus for Murray has been extracting value from Premier’s existing businesses.

Smiggle had its international expansion hit by shutdowns and Brexit. Smiggle has been right-sized in Britain and is returning to strength. It may not be back at pre-pandemic sales, but Murray says it is a better business today with new partnerships and stronger underlying earnings.

For both Smiggle and Peter Alexander, the strategy is to use wholesale channels and online growth ahead of an expansion into bricks and mortar, which Murray sees as premature.

“There is a great opportunity to test and learn online offshore,” he says. “There are providers that can facilitate a seamless customer experience online and which we certainly in the background are working on, before you put physical stores on the ground.”

Neither men would be pinned down on the economy beyond Christmas, but Lew says despite interest rates rising since May, sales have been positive in the lead-up to the online frenzy events.

From here, expect the cashed up Premier to pounce on underperforming apparel brands.

Myer shares lifted 4.6 per cent on Thursday, but Murray’s time and talent is far better spent on core operations. Even at these prices, Premier’s stake in Myer is less than 3 per cent of the value of the company.