Fantastic Holdings: Fabulous results

Fantastic Holdings is doing a good job of digging itself out of a tough spot, but competing with Harvey Norman and JB Hi-Fi isn't the way to do it

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Fantastic Holdings Limited (ASX: FAN) announced its first-half results on Tuesday, reporting a 34.7% increase in net profit after tax to $13.2m, and sales growth of 3.2% up to $227.6m compared to the previous corresponding period. The company also announced a 30% increase in its interim dividend to 6.5 cents. The market certainly liked the results with the share price jumping 17% since the announcement.

Like-for-like sales declined 0.2%, which is reasonable in the current retailing environment. (Like-for-like or 'same store' sales represent a comparison of sales based on the same stores as the prior period, excluding any sales impact of new or closed stores).

The results clearly show that Fantastic has bounced back after recording a 24% fall in net profit in the first half of 2011, compared to the first half of 2010, and a fall in like-for-like sales of 2%.

The company stated that the main contributors to the improvements were improving supply chain and manufacturing efficiencies, tight discount controls and currency exchange improvements. In other words, the company has become more efficient, thereby reducing its costs. Greater control over price discounting has resulted in higher margins and thereby more profit.

Fantastic brands

Fantastic Holdings now operates through five different brands, Fantastic Furniture, Plush, OMF (Original Mattress Factory), Dare Gallery and Le Cornu. Plush specialises in leather sofas, OMF in mattresses and Dare Gallery specialise in high quality home furnishings and furniture. Fantastic Furniture, the company's namesake, specialises in value for money furniture, and furniture package deals. Le Cornu offers services similar to Harvey Norman Holdings Ltd (ASX: HVN), by providing affordable furniture as well as office, storage, outdoor, floor coverings as well as recently introduced Plasma/LCD televisions and home theatre systems.

Dare Gallery & Le Cornu holding Fantastic back

Confirming that retailing is a tough game, both Dare Gallery and Le Cornu are struggling. The company believes Dare Gallery (9 stores) is a non-core business and Fantastic is looking to divest this brand, despite the chain's return to profitability in the half year.

Le Cornu (with just 2 stores) had a brand re-launch in October 2011, but is still unprofitable. Competing against Harvey Norman in anything is tough, but trying to sell TVs and home theatre systems in competition with Harvey Norman, JB Hi-Fi Limited (ASX: JBH) and a multitude of online sites, both in Australia and offshore, is close to retail suicide.

I imagine Fantastic must be ruing the purchase of Dare Gallery in 2008 and Le Cornu in 2009, although they both probably seemed like a good idea at the time. It's likely – we hope – that both brands will be divested in the near future.

The recent demise of the Sleep City bedding chain should ease some pressure on Fantastic's OMF brand in the near future. With 64 stores in the Sleep City chain, OMF has the opportunity to consolidate, and become a core brand for Fantastic Holdings.

Store rollout and growth set to continue

The company opened four new stores in the first half, and a further 4-5 stores are planned for the second half. January and February sales to date are showing growth versus last year, and the company expects the second half of 2012 to show modest improvements in sales and net profit.

Fantastic has two major opportunities ahead of it. The company needs to act on Dare Gallery and Le Cornu fairly soon, and once consumer sentiment recovers, expect to see fantastic (excuse the pun) results from Fantastic and its share price.

The Foolish bottom line

Return on equity rose to 12.2% for the half, and debt/equity also improved to 16.3% in the first half. Despite the 17% rise in the share price, Fantastic is trading on a forecast P/E of 8.7, and paying a forecast fully franked dividend yield of 5.9% (my estimates).

It's definitely one retail stock to keep an eye on, along with Nick Scali Limited (ASX: NCK) and Super Retail Group Limited (ASX: SUL).

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Motley Fool contributor Mike King doesn't own shares in any of the companies mentioned. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

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