Solid results from Dick Smith Holdings Ltd (ASX: DSH) have seen the company's shares leap 10% so far this morning, after similar results released by competitor JB Hi-Fi Limited (ASX: JBH), sent that company down over 10% last week.
Investors have twigged on to the fact that JB and Dick Smith have similar business models (both with New Zealand divisions, full online services and similar in-store models) and elected to purchase the cheaper of the two performers – Dick Smith boasts a considerably lower P/E ratio than its larger counterpart.
Dick Smith now boasts a market cap of $467 million having been sold by Woolworths Limited (ASX: WOW) for $20 million in the past. Here are some highlights of its first annual report since listing on the ASX last year.
Highlights:
- Total sales of $1,227.6m beat prospectus by 0.1%
- Australian like-for-like sales rose 0.8% overall, but jumped 4% in Q4 2014
- EBITDA was $74.4m, beating prospectus by 3.6%
- NPAT of $42.1m, beating prospectus by 5.3%
- Total dividend of 8 cents per share (66% payout ratio), representing a 4% dividend yield at yesterday's prices
- P/E ratio at about 11 compared to JB Hi-Fi ratio of more than 14
- Online sales rose 55% to 4.1% of total sales, with the company targeting 10% of total sales by FY17
With performance appearing to accelerate in the fourth quarter of FY14, Dick Smith could be in for a substantially improved FY15 if this pace continues.
Costs of doing business improved marginally, and Dick Smith plans to open an additional 15-25 stores annually for a total of 450 (up from 377 currently) within three years, an increase of 16%.
Online sales growth is promising and could be an important low-cost driver of profit, however as I have noted in several other articles on the topic, enormous % growth from a base figure of 'not much' still leaves you with 'not much' afterwards.
The challenge will be finding innovative online ways (beyond the current website) to engage customers, encourage purchases and drive upselling to continue the current growth in online sales.
Now What?
For the investor chasing retail and consumer discretionary exposure, Dick Smith and JB Hi-Fi are about as good as it gets, with highly competitive structures and a very appealing business model.
However times are tough in the retail industry and I don't expect either of these companies to outperform in the near future – and competition between the two may soon become an issue.
Here at The Motley Fool, we like to buy shares with a visible 'growth runway' (medium to long-term factors directly favourable to the business) that trade at an attractive valuation and are likely to deliver rapid growth in dividends and earnings.
Unfortunately JB Hi-Fi has only one of these – an attractive valuation, and is not a promising candidate for selection.
Our goal is to outperform the broader ASX over time – and our Top Stock for 2014 has done just that, with plenty more growth left in the tank.
In fact, this small-cap company recently announced a massive expansion to its operations to take advantage of even more long-term growth opportunities delivered by business conditions widely prevalent in Australia at the moment.
It's a stock I already own, and one that I think you might like to have a look at too.
If you're interested, you can read our top analyst's report for free by simply clicking on the link below and entering your email address – it takes less than 30 seconds, and yes, it is completely FREE!
