Whilst it hasn't been a great day so far for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), it has been an even worse day for shareholders of furniture retailer Fantastic Holdings Limited (ASX: FAN). Its share price was down as much as 10% at one stage before recovering slightly to be down around 5%.
The reason for the decline was an announcement from the company this morning explaining that it plans to shut down its underperforming Le Cornu store in Keswick, South Australia. Instead the company plans to invest further in its core brands in the state, believing that this strategy will deliver a long term platform for growth. The remaining Le Cornu store in Darwin will continue to operate as normal.
The company is looking at redeploying staff elsewhere, but acknowledges that redundancies will be inevitable. As a result of these changes the company will incur a one-off non-recurring charge of $9.1 million, which includes a cash charge of approximately $2.5 million. Excluding the one-off charge management expects FY 2016 earnings before interest and tax to be approximately 30% higher than FY 2015.
The Le Cornu brand has been a thorn in the side of Fantastic Holdings recently, posting a 17.3% decline in sales year over year in its half year results. Luckily for the company its other brands have had an outstanding start to the fiscal year helping total sales grow by almost 12% for the period.
In fact, the company expects the Le Cornu business to incur trading losses of around $4 million in FY 2016. Considering the strength of its other brands, I feel this is a good move by management. There will be a little short term pain, but I expect there to be plenty of long-term gain ahead for shareholders as it focuses on growing its core brands.
Much like fellow retailers Nick Scali Limited (ASX: NCK), Harvey Norman Holdings Limited (ASX: HVN), and JB Hi-Fi Limited (ASX: JBH), I expect Fantastic Holdings will produce solid earnings growth for the next couple of years thanks to a booming housing market.
Personally, I see today's decline as a great opportunity to pick up shares on the cheap. With the shares trading at 12x trailing earnings and providing an estimated fully franked 6.1% dividend, this is a very appealing investment in my eyes.
