FY results were very strong in my view so i've taken a position....

FY results were very strong in my view so i've taken a position.

There’s actually a bit of a growth story here with online sales and design works. Online sales grew 150% in 2016, up from 60% in 2015 so has accelerated rather than slowed down and now makes up 9.3% of sales. Growth in online sales and a 3.3% tariff reduction should improve margins (although AUD is weaker and could offset this). I think the markets view is this is a low quality stock (fair enough after the fall post listing) but the whole retail segment suffered and a lot of their under performance can be put down to Metalicus. It’s hard to define a quality company but I think PGR is actually high quality in the sense that their brands have very strong loyalty (something hard to achieve these days). Their loyalty program represents 72% of sales.

Their Design Works division achieved 38% growth in FY16 driven by growth in Everlast apparel and new licenses. Sales from Toys R Us in Japan are also performing very well. In their presentation they said there continues to be a strong pipeline of license opportunities and further growth should be supported by this in FY17. They’re also beginning to sell Jets Swimwear through wholesale channels which will add to growth.

They're looking at acquisition opportunities which I think will prove a catalyst. Management actually have a very good record of building retail businesses. Growing Black Pepper and Review stores from 48 in 2008 to 251 in 2016, creating brand loyalty and driving online sales. So I think they should be able to do the same with another acquisition. They should be able to bolt one on at a cheap multiple, cut costs through synergies and expand. In which case I think they could be worth twice the current price. Noni B is a great example of this as other's here have mentioned.

Amazon
There has been a lot of media attention recently on Amazon and its plan to expand into Au.  In my view the impact from this is still 1 / 2 years away and probably even further out for clothing since it sounds like electronic goods and possibly the introduction of Amazon Fresh are the initial focus. There are already online retailers such as ASOS which exist so this isn’t really a new threat to the market. The threat is that Amazon has vastly superior eCommerce technology and is willing to operate at a loss to take market share. Au retailers are at risk because their online platforms are unsophisticated and they lack the ability to leverage customer data to make highly-targeted offers to individual customers.  

Au is well behind the US when it comes to this with Au retail Ecommerce making up under 5% of total sales while it makes up 7.5% in the US. This doesn't seem like a huge difference but this is expected to grow globally to 14.6% by 2020 and will be led by companies such as Amazon. If retailers don't invest in their online presence then yes companies such as Amazon will take their market share. This is why PGR's strong online sales growth and presence is so important. Coloseium being a US based PE would likely have a better understanding of the threat Amazon poses than some of the operators in Au. Loretta would also be aware of the threat from Amazon having come from the USA (and Loretta surely must of competed with them) so you could argue they’re well positioned compared to competitors.

It's also worth nothing that PGR’s existing brands target an older demographic that prefer to shop in store and try goods before purchasing. A large proportion of their online members use the website for research products before going into their store to buy. Their brands also have a relatively sticky customer base with the majority of customers being a part of their loyalty program. Then you have their designer brands (Jetswimwear / Whiterunway ) which are an entirely different segment again and I don’t think will come under pressure. They key risk here I think is an increased presence of Amazon would lower clothing retail prices in general and their margins would be squeezed. I think PGR has strong brands which are not at risk.

Valuation

While a DCF and transaction based models would suggest PGR is worth 50%+, these models are based on a long term view. There is a bit of uncertainty in the retail space at the moment due to Amazon's expansion plans so I think multiples may be a better approach. What is interesting is that PGR actually listed on quite low multiples which I think is an impression of the retail environment when they listed.
I think they deserve higher multiples now due to an improved retail environment, a less risky business model, improved board and upside potential from acquisitions etc. The bear case to this would be the disappointment post IPO, Illiquidity and Amazon.

So overall I think PGR is a quality, undervalued company that has been missed by the market. In the short term I think a P/E of 10-12 is fair, which based on my FY17 10c eps forecast gives a target price of $1.00- $1.20. Which provides a decent return while we collect a dividend and wait for an acquisition. HY17 results should hopefully provide a catalyst.