It's been an interesting 12 months for shareholders of Greencross Limited (ASX: GXL) with shares trading as low as $4.63 in December, and as high as $8 just last month. With a takeover offer for the business now withdrawn and the annual results due out later this week, it's time to re-evaluate the company.
Here are four things you should watch closely when Greencross reports later this week:
- Same-store sales growth
An important measure of a retailer, same-store sales growth refers to the rate at which sales are growing at existing stores (i.e., excluding sales growth added by acquisition). Greencross has been managing to grow at a decent 6% per annum for the past few years, although the recent economic slowdown in Western Australia has been dragging group sales growth down. Readers could use this year's figures as an indicator of worsening (or not) economic circumstances as well as evidence that Greencross' cross-selling plans are working (or not).
- Cash flows
Greencross has been spending more than it earns in recent years to fund its ongoing expansion. The most recent interim report showed that the company was able to generate positive free cash flow, but I feel the timing of this was very fortuitous given that it resulted from a substantial reduction in working capital requirements that just happened to coincide with a takeover offer. With the takeover behind it, it will be important to see if Greencross is able to continue generating free cash flow as this will be crucial to the eventual success of the investment.
- Store co-locations
Company research has found that co-locating retail, vet and grooming stores can substantially increase customer spend at each of these individual businesses. They're cheaper to operate and have a faster payback time than standalone businesses, and accordingly Greencross has begun to prioritise these co-locations. Investors will want to read management's comments on the evolution and success (or lack of) of this strategy because it is a big part of Greencross going forwards.
- Competition
There's plenty of opportunity for competition in the retail space, and a little less so in the vet space. Co-locations and other initiatives like private label products will be an important way to offset this, yet Greencross is still vulnerable to online competitors in particular. Any word from management on the competition is worth reading further into.
Although it's too small to pose a threat, National Veterinary Care Ltd (ASX: NVL) ("NVL") looks interesting as a pure-play vet operator and vet products supplier. If we doubled its half-year underlying profit to approximate full year earnings, NVL could be trading on a Price to Earnings (P/E) as low as 15 – not expensive, despite the recent rise in the share price. NVL does however have a limited cash balance and there won't be much expansion happening without more capital.