Peter Alexander is a high margin, cash generative business. However, we anticipate a sales deterioration and gross margin drop at Smiggle in FY26e, and think Smiggle will be breakeven, contributing little to our FY26e Premier Investments EBIT forecast. We have lowered our Smiggle store network forecasts, lifted operating costs but also raised gross margin expectation on favourable currency moves.

Australian inflation accelerated for the December 2025 quarter. Even the trimmed mean popped to 3.4%, above the RBA’s target of 3.2%. Financial markets are pricing in a strong chance of a rate hike in February 2026. We are less convinced. While broader inflation has increased, retail price inflation is largely steady at 2.1%. Liquor inflation stepped down. Electronics, hardware, furniture and sporting goods prices were in decline. The outlook for retail inflation is lower over the next 12 months given a higher Australian dollar and lower input costs.

Australian retail inflation is proving volatile overall, but it is subsiding in retail, which does present downside risk to retail sales growth.  In the September 2025 quarter overall CPI was 3.2% while retail inflation was 2.4%.  Non-food retail inflation has dropped to 0.3% on our calculations, with further downside likely over the next year. The combination of higher inflation across the economy and weaker inflation in retail products is not helpful for retailers. Lower retail inflation constrains sales growth, while the RBA is likely to delay any rate cuts given higher living costs.

Premier Investments reported FY25 Retail EBIT of $183 million, down 24%. FY25 sales performance was divergent for Peter Alexander and Smiggle with the same trend continuing it is trading update. We downgrade EPS by 3.4% and 4.5% in FY26e and FY27e given store closures and continued sales declines at Smiggle. We have also lowered our gross margin given commentary about a competitive market. Cost discipline remains a theme at Premier. Earnings growth will be delivered in FY26e but beyond that success will be determined by a recovery at Smiggle and the success of the Peter Alexander expansion to the UK.