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Premier Investments Limited Financial Reports Analysis Contents: 1. 2. 3. 4. 4.1 4.2 5. 5.1 5.2 5.3 5.4 6. 7. 8. 9. 10.

Title Page Executive Summary Introduction & Purpose of Analysis Company & Industry Background Company Industry Analysis of Financial Report Data Profitability Efficiency of Operations Liquidity Gearing Cash flow analysis over the 3 years. Assessment of Other, Relevant Information Summary and Conclusion Appendices Bibliography

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2. Executive summary This report aims to inform readers on the financial health & stability of the company Premier Investments Limited, as it examines the performance of the company for the three year-long periods ending July 2016 - July 2018. The scope of this report has been limited to these three periods as the report also aims to inform Premier Investments Limited of its strengths & weaknesses, and to provide advice on how profits can be improved by changing current daily operations. Consequently, this report is is not concerned with the minutiae of the company’s operations in years prior, as these are less relevant when examining the company’s current operations. For holistic purposes, a brief overview of Premier Investments Limited is provided here, and a more complete review of its history is included in section 4; however this is not the report’s primary focus. Premier Investments Limited is a publicly traded company that has been listed with the Australian Securities Exchange (ASX) since December 15, 1987. (Premier Investments, 2014)

Their focus is on trading retail securities; currently they “wholly own retail conglomerate the Just Group” (Premier Investments, 2014) and also hold a stake in Breville Group Limited worth 28.06%. The Breville Group is known for manufacturing electrical kitchen appliances, such as toasters, kettles, smart ovens & coffee machines (Breville, 2018) & the Just Group owns several brands that sell various clothes & apparel, along with Smiggle which sells personal stationery. (Just Group, c. 2008) The findings of this report; detailed extensively in the following sections, indicate that Premier Investments has both strengths and weaknesses to focus on. Profitability has been in a decline over the last three years, however it is shown in section 5.1 that this isn’t entirely due to the daily retail operations of the business, and hence isn’t as problematic as the reported figures in the financial statements would lead one to believe. The efficiency of the company was also assessed, and reveals a combination of successes and failings; although the asset turnover ratio has seen steady increases over the analyzed years, unfortunately the average accounts receivable period and inventory turnover period have risen in tandem. Liquidity analysis indicates that Premier Investments Limited should not expect to encounter any liquidity issues in the foreseeable future, and examination of the gearing ratios shows that the business is primarily funded by equity rather than debt.

3. Introduction & Purpose of Analysis This report aims to inform readers on the financial state of Premier Investments Limited by examining the company’s financial reports for the last three years; comparing them against each other and against the industry as a whole, to provide a well-rounded and multi-faceted insight into the standing of the company within its industry in the present day. The report will continue with a brief history of Premier Investments Limited, and the history of the industries it is operating in. This is followed by an in-depth analysis of the company’s profitability, liquidity, gearing & efficiency. Accounting ratios (whose calculations will be detailed in full in the appendices) will be utilised to examine the performance of Premier Investments and give advice on how to improve operations. Finally, other relevant information will be summarized before the report’s final conclusions are given.

4. Company & Industry Background 4.1 Company background Premier Investments Limited are a publicly listed Australian investment group limited by shares that invests throughout consumer products, retail and wholesale business. The company was listed on the stock exchange in December 1987 and has seen fairly steady growth in recent years, recording growths of revenue of: 6.6, -0.8, 6 and 0.8% over the past four years (IBIS

World, 2019).The group saw a significant growth in strength through its acquisition of the Just Group, another Australian retail group in 2008. The group, comprised of Australian retails brands such as Smiggle, Portmans, Just Jeans, Peter Alexander, Jays Jays, Jaqui E and Dotti. In addition to this, the company invests in the Breville group comprising Breville and several sub-brands; including Kambrook, Sage & Ronson. (Breville Group, 2018) Premier Investments has seen some success investing in the Breville Group, now holding a stake worth approximately $527 million. More recently it has seen growth in brands like Smiggle, which began operating on an international basis in Britain in 2016, (Evans, 2019) allowing for more continued development both domestically and internationally.

4.2 Industry background The group finds itself primarily within the Australian retail market and as such has grappled with the transition in retail shopping standards from brick and mortar stores towards online purchasing. The retail industry itself seems to be slowing with growth sitting at about 1.2% predicted over the next 5 years (IBIS World, 2019) whereas online sales are predicted to rise by 9.2%, presenting a significant threat to the retail industry. The group has achieved strength in the past few years through investing in strong retail share groups in Australia as well as in online sales. Consequently Premier Investments enjoyed a record 12% jump in share price since the start of 2019. However, continued competition will come in the form of other large Australian retail groups such as David Jones Pty Ltd and the Myer Group, in addition to the challenge that online shopping has presented to the retail environment.

5. Analysis of financial report data This section will examine the data from Premier Investments’ financial reports for the years 2015 - 2018, and use them as data points for financial ratios & trend analyses.

5.1 Profitability For the purposes of analysis the ratios calculated in appendix A.1 are restated here.

The profitability ratios have mostly decreased in the years 2015 - 2018, with some exceptions. From the table of percentages above, the ROE increased between 2016 and 2017 by 0.1 percentage points. In 2016, a $1 investment by a shareholder would yield 7.76 cents, whereas in 2017 it would yield 7.86 cents; which would be pleasing to investors. This indicates that Premier Investments Limited was increasingly maximising the returns they generated on every

dollar invested in their company; which indicated they were becoming more efficient and profitable. However, the value of $1 worth of investment in assets by Premier Investments Limited is continually becoming of lesser worth. In 2016, Premier Investments could expect to see a return of 8.94 cents for every $1 they invested in their assets, and only saw 8.55 cents of this dollar in 2017. It is clear from the calculations in appendix A that Premier Investments Limited continued expanding their asset base throughout this time, and that the decline in ROA is due to declining EBIT figures. It is recommended therefore that Premier Investments Limited seek to use their assets more efficiently; perhaps by reducing overhead costs or by reducing their operating cycle. This will be further explored in section 5.2. The net profit margin has fluctuated between 2015 - 2017, indicating that the ratio of sales to profit has been inconsistent over this time. Only 12.95 cents were seen from every dollar in sales in 2015, while in 2016 this figure increased by 1.16 cents, or 8.96%. Unfortunately this decreased to 13.3 cents of net profit per dollar of sales in 2017, indicating that additional costs were seeing diminishing returns on goods sold for the company. What is especially noteworthy from these figures is that all the profitability ratios decreased quite considerably for the 2018 reporting period. The net profit margin alarmingly sank 2.18 percentage points between 2017/2018. This slump is made more visible in the following graph, showing the net profit margin for Premier Investments Limited as a function of time.

According to the calculations in appendix A.1, profitability ratios decreased even as sales revenue went up. This may lead potential investors to question the efficiency of Premier Investments Limited, especially when observing the earnings & revenue chart below. It is clear from the graph that sales have not only been steady, but have increased year-on-year since the start of 2015; yet earnings remain almost stagnant, and even regress in the year 2018.

(Simply Wall St, 2019) 2018 appears to have been a tumultuous year for Premier Investments Limited, however upon further inspection of the financial statements it doesn’t appear necessary to instigate any changes on behalf of 2018’s poor performance. Accountants depreciated and amortised $58,904,000 worth of assets in the 2018 reporting period, which is 226% of the prior year’s figure. For comparison, look at the following graph showing depreciation and amortisation costs from 2015 - 2018.

The difference between the 2017 & 2018 depreciation figures is a sizeable $32,833,000 while the difference in the 2017 & 2018 profits before tax is only $15,180,000. Had depreciation and amortisation costs remained similar to prior years, it is apparent that Premier Investments Limited would have been more profitable.

Although Premier Investments Limited returned profits for all three years, they have not been as profitable as other organizations in their sector; as the average ROE for the last three years in the specialty retail industry has been 12.5%. (Simply Wall St, 2019) This signals to investors that, although Premier Investments may be a sound investment that will produce returns greater than a savings account, there are other alternatives worth consideration also. In the interests of securing more shareholders and future investments, measures should be taken to improve the ROE over time. Overall, the profitability of Premier Investments has in decline for the last few reporting periods. Although the steepness of this decline going into the 2018 reporting period does appear to be a temporary anomaly which should not be a source of worry for executives in itself; the trend observed in the 2016-2018 reporting periods should still leave executives wary. Fortunately, the sales revenue has seen consistent, strong growth throughout the years examined in this report, which is a promising sign for the company.

5.2 Efficiency of Operations The following portion of analysis is based on the ratios calculated in Appendix A.2, summarized below.

Regarding the percentage of asset turnover indicated by Premier Investments’ reports, as sales grew each year spanning 2015 - 2018, the average of total assets held followed a similar curve, maintaining steady growth in asset turnover year on year and indicating positive growth in employment of assets to generate revenue. A steady and constant growth rate is a good indicator of consistency of efficiency of operations - whilst the group can continue to grow asset turnover, a steady rate is maintainable. The asset turnover period, however, is in a rate of steady decline, moving from an average period of 623 days turnover in 2015 to 538 in 2018. A stronger asset turnover is again a decent indicator of progress - as mentioned before, progress in asset management is a sign to shareholders that the business is actively involved in positive employment of assets in generating useful sales revenue. This concept, however, does not continue when analysing the trend of the inventory turnover period, which has been steadily increasing year on year since 2015. This can be attributed to the fact that cost of sales has been growing at a more accelerated rate than the average inventory - ultimately showing that inventory is lingering and extending the general operating cycle. The rate of growth in the inventory turnover period is not as steep as that of the asset turnover period decline, having grown by a period of approximately 18 days since 2015. Being

able to manage their inventory more effectively to suit consumer sales demand may help to regulate the inventory turnover period to avoid unwanted further growth. The negative growth trend also continues with the average accounts receivable settlement period. Again, whilst the average balance of accounts receivable has grown slowly year on year, at an average of $3,125,000 p.a. between 2015 and 2018, the assumed credit sales (10% of total sales) has grown at an average of more than $7,818,000 p.a. Whilst a sales increase would normally be a positive indication, in this context with the credit sales growth outpacing the average accounts receivable by more than 2.5:1 it increases the average accounts receivable settlement period each year, to an average of nearly 70 days in 2018. Again inversely, the average accounts payable settlement period has experienced a predominantly steady decline over 2015-2018, however between 2015 and 2016 the period remained stagnant before declining to reach shy of 62 days in 2018. This data point is not a particularly negative outlook, as Premier Investments Limited is not regularly leaving debtors in the lurch, however at the same time, generally speaking, a higher accounts payable settlement period is indicative of good business terms negotiations. Ultimately it can be said that Premier Investments Limited have made demonstrative improvements in some areas of their asset management efficiency, however have room to improve their account management and management of inventory turnover being used effectively to generate positive revenue.

5.3 Liquidity Through analysis of the liquidity ratios of Premier Investments it can be seen that the ratios present very different ways in which the group uses their money and invests.

Firstly, the current ratio of Premier Investments sits well above the industry average (1.9) with their current ratios for the last 3 years averaging out to 2.8. This is much higher than many other industry competitors like Myer group (0.8) suggesting that Premier Investments spends a larger amount in investing than many of its competitors, this likely is also due to the fact that Premier Investments could hold a large amount of inventory. Years like 2016 (with a ratio of 2.23) present particularly high ratios but this may be largely to do with their heavy investments in expansions overseas with brands like Smiggle. (Evans, 2019). Thus, this ratio alone may prove somewhat inaccurate without the use of comparable ratios. Use of the quick ratio allows for the removal of inventory, which could be affecting results here. The quick ratio (acid test ratio) of Premier Investments over the past three years has worked out

to: 2.23, 1.44 and 1.68 respectively. Premier Investments have shown that they have strong liquidity over the three years; with their ratio staying clearly above 1:1, which enables them to pay off their short term liabilities. In comparison to industry averages, Premier Investments’ liquidity is consistent with their competitors. The average quick ratio for the industry is around 1.58 (PMV), 2019) whereas for the past three years Premier Investments has recorded figures of 2.23, 1.44 and 1.68 respectively. It can be seen that Premier Investments has been tracking near this average over this timeframe. In terms of the cash flow liquidity ratio for Premier Investments, they have showed continued strength in this area. The company has presented strong results over the past three years achieving ratios of: 0.96, 0.69 and 0.78. This in turn reiterates the strength of Premier Investments’ liquidity over the past few years. Furthermore, the upward trend in the cash flow ratio that can be observed over the analyzed reporting periods indicates a focus within the company to further improve their liquidity, and is suggestive that cash flow will be an ongoing strength for Premier Investments in the coming years.

5.4 Gearing The results of the ratios calculated in appendix A.4 are restated here for ease of reading.

The ratios measures the depth of an entity’s debt to its equity. This ratio indicates the entity’s financial risk to which an organization is subjected, as extreme debt would probably lead to economic hitches. A lower gearing ratio indicates a lower debt to equity ratio which means the entity is borrowing less to fund its operation compared to its equity. Premier Investments’ gearing ratios indicates it’s very stable utilizing its equity instead of debt. Premier Investments’ debt ratios show that it used $5.12 of equity per dollars to debt in 2016. In other words, it had per $1 of assets $0.195 of borrowing in the financial year of 2016, while financing every asset of $1 by $0.805 through equity. Although there is a minor increase in the gearing ratios in year 2017 and 2018 from 19.5% in 2016 to 23.09% and 23.21% respectively. This means that the entity has increased its assets finance through debt slightly, but well below the industry average which was at 51.14% in the last financial year, where Premier Investments Limited was only at 23.21%. A higher debt to equity ratio does not mean that the long-term financial viability of the equity is put at risk, as many established entities have gearing ratios over 50%, which is used as an arbitrary benchmark. It’s important for entities to have stable gearing ratios in order to access further long-term debt.

6. Cash Flow Premier Investments Limited has seen a steady growth in the past three years. Its sales revenue grew from $1,049,226 million in 2016 to $1,182,221 million in 2018. Beside the revenue growth cost of goods sold raised as well from $378,946 million in 2016 to $443,907 million in 2018. Premier Investments recorded solid growth momentum in its Peter Alexander and Smiggle brands, boosting the greatest online-sales results. Premier Investments also further expanded its operations by moving its Smiggle brand to another 10 countries, where its product will be on display in leading retail stores. Their online sales have improved significantly, and with well-developed plans for its brands to expand to Amazon Germany, Spain, France and Italy. The online sales alone account for approximately 11% of the group sales. These expansions and the whole sales strategies that in place are expected to improve the margins and reduced capital investment in coming years. Premier Investments’ expansion is clearly visible through its annual reports. Its bank balance has dropped throughout the past three years, but during same period there is a spike in investments and accumulation of more inventory. During the same its employee base has increase significantly from 7000 in 2016 to 9000 employees in 2018. The group has also some growth in terms of liabilities and debt which was significantly low in 2016 but its still well below the industry average.

7. Other Information Premier Investments has many strategic plans already in place for the short and long term. The Group is expanding to the international market and also building a strong foothold in the online marketplace, which is already booming and would be the norm of the coming generation. Sally Herman has joined the group as a Non-executive Director, she brings in vast experience in retail, manufacturing, financial services and property. The Group is committed to sustainability, all its people, community, environment and ethical sourcing of all its raw material. Premier Investments is committed to providing a safe secure discrimination free workplace to all its employee, with generous rewards and recognition for their retail staff. They have made v...