Veterinary services and pet care retailer Greencross Limited (ASX: GXL) announced a pleasing set of half-year results last Tuesday; revenue was up, profit was up, but more importantly, the company was able to achieve solid like-for-like sales growth for the first half of FY2017.
This measurement of same-stores performance is important when assessing expanding retailers like Greencross, and it appears the company's plan for growth is working.
Greencross is the largest integrated pet care company in Australia, with 124 veterinary clinics and 200 stores through its City Farmers and Pet Barn retail brands. It also operates clinics in New Zealand and has a 50% stake in the Animates retailer there. The company listed in 2007 with ambitious plans for expansion and isn't about to stop now.
After adding 16 retail stores and 10 clinics in the first half of FY2017, Greencross is aiming to add 20 stores a year towards its long-term goal of 350 stores across Australia and New Zealand. That's more than 100 stores to reach its current target. This growth story is far from over.
What separates Greencross from other pet care retailers and veterinary service providers is that it can offer both under the one roof. The company currently has 25 clinics operating inside its retail establishments and believes the current network alone will support 120. Furthermore, all future stores will include a clinic where practical.
There are a number of benefits from having vet clinics situated within the retail store. Firstly, Greencross has found that retail spending is higher and the frequency of customer visits is higher for cross-shopping at in-store clinics. Capital expenditure costs to set up an in-store clinic are around half, versus an acquisition.
Then there's also the ongoing savings from maintaining fewer properties. Greencross management has observed what counterpart Pets At Home has achieved with a similar model in the UK and aims to replicate that success here.
Further growth opportunities for Greencross include its new private label pet food, in-store grooming services, online retail sales and their preventative healthcare program for dogs and cats, Healthy Pets Plus.
If you're not convinced of the feasibility of Greencross' expansion, consider this: according to a pet ownership study conducted by Animal Medicines Australia, Australians spent an estimated $11b on their dogs and cats in 2016. That would put Greencross's current market share at less than 10%. Plenty of room to grow in what is a fragmented industry.
Often a key risk for expanding retailers is the increasing debt incurred when acquiring and creating new stores. What impressed me from Greencross's recent result is that despite its growth it was actually able to reduce net debt over the period. The latest dividend will represent a payout ratio around 50%, allowing the company to effectively use earnings to sustain growth and manage debt.
Foolish takeaway
Famous fund manager Peter Lynch liked to invest in companies that were easy to understand. A famous mantra of his is "invest in what you know". Some of his most successful investments were retailers that expanded nationally, with increasing like-for-like sales, serviceable debt, and management that followed their expansion plans as outlined to shareholders. For me, Greencross ticks those same boxes and I intend to be a shareholder for the long term.
