Dick Smith Holdings Ltd (ASX: DSH) shares plunged nearly 25% in August despite initially rising by over 10% the day following its earnings release late in the month.
Long-term concerns
Dick Smith reported earnings growth of 7.3%, in line with estimates, however there were key negatives in the full year result that concerned investors:
- Weak New Zealand sales;
- Weak cash flow;
- Disappointing size and trend of Q4 sales;
- Q1 2016 sales not looking much better;
- Second half sales missed forecasts and do not compare well with competitors such as JB Hi-Fi Limited (ASX: JBH) and The Reject Shop Ltd (ASX: TRS)
The disappointing results saw shares sold short rise above 11% of the free float following the earnings release, despite Dick Smith appearing significantly cheaper than rivals.
Analysts estimate that earnings per share for the 2016 financial year will be 19.5 cents, implying a forward price to earnings ratio of just 6.95 versus closer to 15 for peers. The consensus dividend per share estimate is 13.4, implying a forward dividend yield of 10% based on yesterday's closing price of $1.36.
Is now the time to buy?
As my colleague pointed out last month, Dick Smith has a lot going for it despite the poor sales trend. Major drivers of growth over the next 12 months include:
- Strong online sales: Dick Smith already has a strong online presence that accounts for 7% of sales and is forecast to grow to 10%.
- More stores: Dick Smith plans to open an additional 15-25 stores annually for a total of 450 (up from 377 currently) within three years.
- Private-label products: Dick Smith private label products already account for 12% of sales and management forecasts this number to increase to 15% in coming years. This high-margin sales channel continues to perform better than expected.
- Improved product selection: Dick Smith is adding home appliances to its existing stores, similar to JB Hi-Fi's HOME stores. The downside is a race to the bottom (on margins) on these products.
I'm quite sceptical that Dick Smith is as cheap as it looks. We've seen numerous retail stores disappoint investors over the last 12 months, however until now these have largely been clothing retailers. Dick Smith's ability to leverage its agreement with David Jones and find same-store sales growth will determine the direction of the share price over the next 24 to 36 months but I won't invest until I see more signs of positive progress.
