Experts question growth potential in Super Retail Group’s $610 million bet on Rebel Sport

Super Retail Group, the market darling behind Supercheap Auto and Ray’s Outdoors camping stores, might have delivered the biggest retail acquisition in three years, but there are questions about whether the Queensland retail giant can get the growth it needs to make the purchase of Rebel Sports pay dividends.

Announcing its $610 million purchase of Rebel Group, Super Retail has flagged a 44% increase in store numbers for Australia’s largest sporting goods company to 185 in the medium-term.

But the deal has thrown up questions: given retailers have been complaining for months about fickle consumers, will the decision prove genius or foolhardy? And why buy from private equity (the vendor was Archer Capital), when market sentiment soured against PE after it flogged Myer?

Retail consultant Brian Walker says the Rebel purchase “makes perfect sense” for Super Retail Group and underscores the rationalisation of Australia’s retail sector.

“It’s a smart acquisition: it’s deep into a category, it’s big-box retail,” Walker says. Besides Supercheap Auto and Ray’s Outdoors camping stores, Super Retail owns BCF (Boating Camping and Fishing) and Goldcross Cycles.

“These guys are smart operators in their own right. They would have done all the due diligence.”

Walker describes Rebel Group as a “specialised business, well known, with good locations and very high brand knowledge across Australia.”

And he questioned criticisms Super Retail Group paid too much – pointing out that earnings before interest, taxation, depreciation and amortisation of 7.9 compares favourably with retail buys over the past five years.

On concerns Super Retail Group was going head-on into bricks and mortar when the trend seems to be heading towards online sales, Walker points out that 92% of sales are done in stores.

“The reality is that they’ve got the buying power, they can play deep and that’s what they’ll do.”

Tom Elliott, of Beulah Capital, agrees that Super Retail Group are good retailers, but questions where the quick growth will come from, given Rebel already has 24% market share.

On the plus side, the lifestyle area is an area where people seem to be willing to spend money, Elliott says.

But on the other hand, profit fell in the last year under Archer Capital, and Elliott expects the previous owners to have extracted much of the growth. Rebel generated $603 million of revenue in the 2011 financial year.

“It’s in the execution,” Elliott says.

The acquisition comprises 90 Rebel Sport stores, 36 A-Mart Allsports stores and two Performance Sports stores. An initial public offering for Rebel Group was pulled last year.

Super Retail Group’s sales jumped 16.4% to $1.092 billion in 2010-11, with profit up 46% to $55.6 million.

The listed company says this acquisition is “highly complementary” and is expected to deliver mid-single digit earnings per share accretion in the 2012 financial year. It is accompanied by a $344 million raising.