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Is Grays Ecommerce Group Ltd share price set to fall?

Grays Ecommerce Group Ltd (ASX: GEG) evolution continues after the company announced the sale of its fixed price retail (FPR) business for $5.2 million.

The FPR business consists of online retailers oo.com.au, dealsdirect.com.au, and topbuy.com.au. Grays will basically be left with the Grays Online auction, its Business to business (B2B) online auction division and the Grays online wine retailing business.

The wine division is the third-largest online wine retailer in Australia – but only had gross sales of $31 million in the 2015 financial year (FY15). By comparison, Roy Morgan research suggests Australians spend $296 million on alcohol each week, and the Grays wine business doesn’t even feature in the top 10 retailers for alcohol sales. Woolworths Limited (ASX: WOW) Dan Murphy’s and BWS brands, and Wesfarmers Ltd’s (ASX: WES) Liquorland and 1st Choice brands lead sales, accounting for more than 60% of alcohol sales each week.

Sales and revenues to fall

The sale of the FPR business will also see a substantial amount of revenues walk out the door. So much for the mooted ‘synergies’ and cross-selling opportunities the company boasted about when Grays purchased Top Buy for $2.25 million in April 2004 and DealsDirect for ~$12 million in January 2014. OO.com.au was owned by Grays Online when it merged with Mnemon in 2014, for which an additional ~100 million shares were issued. One source suggests Grays bought oo.com.au for just under $10 million in 2013.

Clearly, Grays has made a huge loss by selling its FPR business, despite the company’s statement that “The sale will be earnings accretive to Grays excluding a one-off writedown of goodwill associated with the business.

If you sell a loss-making business, it will always be earnings accretive – but the company doesn’t say what its profit or loss will be on the sale, nor how much the writedown will be – which smacks of trating investors and existing shareholders like idiots. At the end of June 2015, Grays had $30 million worth of intangibles, so a substantial writedown could be on the cards.

The sale also shows that online retailing is not as easy as it appears to be. As CEO Mark Bayliss recently noted, the FPR business was facing challenging times. In FY15, the Business to Consumer (B2C) division, which incorporated the FPR businesses, reported revenues of $136.1 million, but an earnings before interest, tax, depreciation and amortisation (EBITDA) loss of $1.7 million – more than 3 times higher than in FY14.

Foolish takeaway

It’s likely that Grays will see its share price hammered despite rising more than 5% yesterday. You can’t sell a significant portion of your company and expect it to be worth as much before. Competition in the online space is extremely difficult, particularly for smaller players, and as such investors might want to give Grays a wide berth until it can prove it has a viable business offering.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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