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Why I think the Greencross Limited share price is good value below $7

The Greencross Limited (ASX: GXL) share price rose 5% at the open today, after the company reported another set of strong interim results. With both the size of the network and like-for-like sales at existing stores continuing to grow, is Greencross on track for big things in the future? Here’s what you need to know:

  • Revenues rose 14% to $412 million
  • Net profit after tax (NPAT) rose 17% to $22 million
  • Earnings per share rose 15% to 19 cents
  • Dividends of 9.5 cents per share
  • Generated $5 million in free cash flow
  • Outlook for “underlying EBITDA and NPAT growth at similar levels to FY2016” (+12% and +10% respectively)

So What?

The last six months were a strong period for Greencross. Although sales growth has slowed somewhat, group Like For Like (‘LFL’) or ‘same store’ sales were respectable, with retail rising 4% while vet sales grew 5.3%. This excludes the sales added by new stores and clinics, although there were plenty of those with Greencross adding 16 retail stores and 7 clinics in the half. The company upgraded its full-year target to 21 new retail stores and 16 new vet clinics. It’s important to note that the second half will likely be weaker, however, with the full year outlook for around 10% NPAT growth, compared to 17% in this half.

One of the things I like most about Greencross is that management has a solid, yet simple strategy for growing the business. They’ve talked about it a lot, it’s easy for shareholders to follow, and this half again delivered progress on all of the important metrics:

  • Loyalty club cards accounted for 87% of revenue, up from 85%
  • Online sales grew 45% (from a very low base), with basket size also increasing 8%
  • Private label sales grew to 21% of revenue, up from 20% previously
  • In-store clinics have doubled the number of customers that also shop retail
  • % of stores with in-store clinic up from 6% to 10%
  • % of stores with a grooming salon up from 27% to 31%
  • Number of customers who shop at more than one format (Retail, Vet, and Grooming) grew 23%
  • Total debt burden fell due to strong cash flows

The most under-rated part of all of that is probably the loyalty card, as it gives Greencross huge visibility on customer sales and spending habits, allowing the company to more selectively target customer spending habits.

Now What?

I’ve previously noted that Greencross was higher risk because the company carried a large amount of debt and was losing cash. That now appears to have come to an end (in line with management forecasts), with solid cash flow generation over the last few reporting periods. From the above stats, we can also see that Greencross continues to execute well on its strategy and management has a good track record of hitting the targets that they set.

Greencross appears to be in a good place over the next couple of years as acquisitions continue, and the company rolls out its multi-format stores and these stores grow to maturity. Beyond that it is tough to see where the company will head, but Greencross appears to be a well-run business and I think it is good value below $7.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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