Vet and pet retailer Greencross Limited (ASX: GXL) reported a little later than I expected this year, but the results were worth waiting for. Improvements were evident across almost all categories, although a concerning decline in sales in Western Australia bodes poorly for the franchise if Australia in general is hit by tough economic times.
Here's what you need to know:
- Revenues rose 14% to $734 million
- Net Profit After Tax ("NPAT") rose 82% to $34 million
- Underlying NPAT rose 10% to $42 million
- Underlying earnings per share of 37 cents per share
- Dividends per share of 18.5 cents per share (up from 18 cents last year)
- Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) margins widened
- Positive free cash flow
- Group 'Like For Like' ('LFL', or 'same store') sales growth of 4.4% overall (3.4% in Australia)
- Outlook for 20 new store openings (completed 7 so far), 15 new co-locations (6 so far), and 'disciplined' vet acquisitions (2 so far)
- Forecast for 2017 NPAT to grow at a 'similar' rate to 2016
- LFL sales rose 2% in July and 4% in August, Vet clinic visits up 5% so far
So What?
In this article two weeks ago I suggested investors specifically watch for updates on LFL sales growth, cash flows, store co-locations, and competition. Like-For-Like sales growth slowed to 3.4% in the Australian business, with 7.5% LFL growth in the New Zealand businesses bumping up the group average to 4.4%. Veterinary LFL sales rose 3.6%, caused by a 3.6% lift in customer numbers. Not a bad performance, it's interesting to note that LFL sales appear to have slowed Australia-wide, and aren't just being dragged down by a struggling WA economy.
Cash flows were great, with the company generating enough cash to cover all ongoing business expenses as well as the dividends. In the half-year results I wrote that I was curious about the timing of a huge reduction in working capital expenses and thought it might have been used to temporarily boost cash flows to encourage shareholders to reject a takeover. That reduction in working capital has been sustained for the full year, and contributed greatly to group cash flows.
Store co-locations are reportedly performing well ahead of expectations, with the number of Australians who shop across more than one format growing by 36% to 136,000. These shoppers are highly interesting because they represent 9% of the active customer base, yet account for 21% of sales revenue. Management intends to accelerate the roll-out of store co-locations and reports that approximately half of its portfolio is suitable for retro-fitting with at least a vet and/or grooming salon.
Competition unfortunately didn't rate a mention other than to say that the market was increasingly competitive and more targeted discounting was required. This is not good news, though it was also pleasing to see that private and exclusive brand sales grew to 20% of total sales (up from 15% previously) during the year, with management targeting 25% of total sales in 2017. This may help in the competitive process and should help margins.
Now What?
There were a number of other initiatives that experienced success during the year including the loyalty program (now with 3 million members) and online sales (grew 80%, but only represent 1% of revenue). For reasons of length I can't discuss them here other than to say that management has a great batting average with its new initiatives recently.
A greater concern is the slowdown in business conditions in Australia. At the half-year, management reported that Like For Like sales had grown 5.1%, while revenue at the time was up 18%. For the full year they were up 4.4% and 14% respectively to indicate conditions have worsened in the last six months.
With increasing customer engagement, a steady stream of opportunistic (mostly single-location) acquisitions, retrofitting of existing stores to support co-locations, and initial success of other initiatives, I continue to believe Greencross is a high quality business. However, with headwinds increasing, high levels of debt, and trading at just over 19 times its underlying earnings I think the company is fairly priced right now and no longer the standout bargain it was eight months ago.
