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Fantastic Holdings not so fantastic this year

Fantastic Holdings (ASX: FAN) competes with the likes of Nick Scali (ASX: NCK) and Harvey Norman (ASX: HVN) in the furniture retail business, under such brand names as Fantastic Furniture, Dare Gallery and Plush. For FY 2013, sales were mostly flat with a 0.1% decline in sales to $445 million, but net profit was much lower — down 35.6% from $20.99 million to $13.51 million.

The majority of the difference in cost this year can be found in employee expenses and property purchases for future stores, and without the benefit of a growing market and revenues, those become harder and harder to cover. Fantastic Holdings currently has 136 stores nationwide, and according to the report the weak second half sales have offset the stronger first half.

Due to the need for discounting to maintain sales levels, the same amount of business brings in less money in the end, so margins decline. Similarly, return on equity, which has been regularly in the high teens or twenties, was 12.49% this year. It is still a good number for a regular company to work towards, but now it is only a half to a third of what it once used to be.

Net profit margin is down to 3.3%, and free cash flow has gone negative. If the economy doesn’t pick up soon, this company will need to restructure. Fortunately, it isn’t overburdened with a lot of debt. Its gross gearing is a very manageable 23.42%, but has started to creep up over the past two years.

The company and shareholders should be cautious. If funds become tight and staff are cut, there may be also inventory write-downs to get finances to accurately reflect current market value. This is when shareholder equity and share price get hurt.

It would be wise to watch the other furniture retailers as use them as a benchmark as to this company’s near-term prospects. If it can’t keep up with the others, then major readjustment may be needed.

Foolish takeaway

If the property market were to turn around over the next few years, then sales could go up, but even with low interest rates now, it is still not enough to drive home buyers into the market. If they don’t feel confident that next year will be better, or they’re worried about having a job at all, then it won’t change quickly.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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