Founded in the early 1930s, vacuum cleaner specialist Godfreys (ASX:GFY) is a retailer many will be familiar with — if for no other reason than the colourful ads featuring former Managing Director John Hardy.
Comb-overs and low-rent advertising tactics aside, this is a business with some real pedigree, and thanks to a listing on the ASX late last year, one that you can now own a part of. Needless to say, 'can' and 'should' are two entirely different things on the sharemarket, so before you rush out to hoover up some shares, if you'll pardon the pun, let's run the ruler over the business.
A long and (mostly) successful history
Over the past 80-odd years, Godfreys has grown to be one of the largest speciality retailers in the country, with a 27% share of the market.
With over 200 retail outlets, the business is expected to turn over about $185 million in revenue this financial year — with 79% of those sales coming from company owned or licensed products. Importantly, much of what it sells makes it to the bottom line, thanks to attractive gross margins and lean operating costs.
Encouragingly, sales have grown strongly recently; up about 20% over the two years through to 2014 (in its pre-float days). That's set to grow by almost 7% this year.
But things very nearly came unstuck a few years back. In 2006, Godfreys was sold to private equity and, as is the standard play for such interests, duly loaded up with mountains of debt. As you can imagine, things didn't work out well, but the folly of private equity was to be the benefit of the original owners, who were able to buy back the business for a fraction of what it was sold for only a few years earlier.
And these are some savvy, hands-on operators. Take, for example, Managing Director Tom Krulis, who reportedly sold 60 vacuums and steam mops to institutional investors and fund managers during the pre-float investor road show.
Why buy?
Retailing is typically a tough business. It's hard to carve out a meaningful competitive advantage, you are often hostage to the whims of consumer sentiment and a lot of money gets tied up in inventory. As such, investors should always approach retailers with some caution.
There are however some characteristics that allow for some confidence. Firstly, Godfreys has a valuable brand that has been built up over many decades. For many, the name 'Godfreys' is synonymous with vacuum cleaners, and that means its advertising dollars go a long way when it comes to building brand recognition.
Another appealing trait is that, unlike many retailers, Godfreys is relatively insulated from economic conditions. Vacuum cleaners are considered a 'non-discretionary' product; in other words, they are considered essential household items, and people typically buy one as soon as theirs breaks.
Finally, store fit-outs are modest and quite cost effective; typically, company owned stores enjoy a payback period — the time taken to recoup its setup costs — of just 8 months.
Turning to the numbers, Godfreys expects to distribute between 70-80% of net profit back to shareholders in the form of fully franked dividends. At the current price, and based on prospectus forecasts that puts shares on a dividend yield of around 7% — before franking credits are included. In the current 'yield hungry' market, that's particularly attractive!
