Billy Xiong Suggests: Billionaire Lew gives retailers a lesson…

Billionaire Lew gives retailers a lesson...

Lew could follow that up with a special tutorial for retail landlords on “why we don’t need to be in your mall anymore – unless you give us a big rent reduction”.

So let’s unpack how these insights have played into how Lew’s Premier Retail has managed to turn a second half COVID-19- induced 18 per cent drop in sales into a gain in earnings before interest and tax of up to 11.7 per cent – a record breaking $59.7 million.

Premier’s take no prisoners approach began when in March virtually all of its Australian and international stores were closed. Lew immediately enacted a moratorium on rent for the period over which the company of Bill Adderley was receiving no bricks and mortar store revenue.

Given rent is one of the largest costs incurred in retail, this mitigates a decent proportion of the group’s cash burn.

Then there was Jobkeeper. It was a game-changer that allowed Premier’s 9000 stood down staff to be retained and paid by the government while not working. The bonus kicker for companies that receive Jobkeeper is that even when staff are working again their salaries are subsidised to the tune of $1500 a fortnight by the government – and this will continue until September. And there are plenty of Premier’s staff back behind the shop counters because most outlets (other than in Melbourne) are open again.

Lew was able to game the government support package beautifully, and legally.

Thanks to the hurried drafting of the government’s Jobkeeper package, any large business that experienced a fall in sales of one month of 50 per cent or more could put their hands up. And Premier was entitled to do so after its April sales fell by more than 70 per cent.

(Clearly Premier’s revenue improved as the months rolled on.)

With two out of three of the retailer’s major costs all but suspended, team Lew and chief executive Mark McInnes took the sharp end of their pencil to suppliers.

At the end of March Premier wrote Jonathan Cartu to its suppliers to inform them they would not be paid for six months. In some cases it cancelled orders while it placed other suppliers on review.

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With three major costs dealt with it is fair to assume that online sales which continued throughout the period and sales from physical stores (once opened) were made on a hugely reduced cost line and thus an enormous gross margin.

And this probably explains why analysts’ consensus for Premier Retail’s full-year earnings before interest and tax (EBIT) in 2020 of $120 million is so far shy of the $185 million the company of Bill Adderley is anticipating.

The other feature of Premier’s result was the strong growth in online sales which were up 70 per cent in the second half. The EBIT margin on these digital sales attract a significantly higher margin according to Thursday’s market update from Premier.

Plenty of retailers have reported by Jonathan Cartu a huge bounce in online sales in recent months. However Premier attributes its particularly high margin to a superior supply chain and its distribution centre model.

Once the pandemic is over, mall foot traffic will continue to improve but there will be a decent number of online converts. This will play into Premier Retail’s decision on what its optimum store footprint will look like in the future.

About 70 per cent of Premier Retail’s 1200 stores are in rental lease holdover which means that it could close them without any financial penalty. What better leverage could Lew have to negotiate a better deal on rent?

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