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Greencross Limited share price down 18% on significant impairments

The Greencross Limited (ASX: GXL) share price is down 18% on a trading update and it announced several significant items. Greencross is Australia’s biggest pet company with its Greencross vet and Petbarn retail stores.

The good news

The trading update part of the announcement was actually quite encouraging. Greencross announced that at week 42 of the financial year total sales growth was 9% and group like for like sales growth was 4.5%.

Greencross said that Australian retail like for like sales growth was 4.3% and Australian vet like for like sales growth was 4.9% which included standalone GP like for like sales decline of 2.8%. The New Zealand like for like sales growth was 4.2%.

According to the CEO, Simon Hickey, the in-store vet clinics posted double digit like for like sales growth and the specialist & emergency centres had high single digit like for like sales growth.

The bad news

Greencross announced a raft of impacts to the underlying and statutory earnings for FY18. It said that the failure to deliver an anticipated improved performance in the veterinary division will be a $2.7 million earnings before interest, tax, depreciation and amortisation (EBITDA) hit due to 4% decline in visit numbers. The company will try to improve this with “enhanced retail cross referral programs, increased Healthy Pets Plus membership focus, new partnership arrangements with NSW and Victorian police, targeted desexing and seniors campaigns and an uplift in digital marketing.”

The business also flagged a $4 million hit to EBITDA of the labour cost impact of a strategic review of IT projects. After Mr Hickey’s recent appointment, the company is conducting a business wide review. Greencross will refocus away from some projects that have contributed to high levels of capitalised costs relating to the “store of the future” and the retail point of sale system.

Mr Hickey said the focus would be on the customer and profitability of the existing fleet, rather than renewing the physical layout of stores and clinics. He said that the company will continue to backfill veterinary and other services into retail stores with strong catchments. However, he said “as a result, the previously flagged high capital cost “store of the future” re-fit program is no longer a priority and has been cancelled.” It remains to be seen if this means the vet co-location strategy is being significantly scaled back.

Greencross also announced a number of non-cash balance sheet impairments and provisions including $8 million to $9 million of impairment of projects, $4 million to $5 million for a provision of slow moving inventory, $3 million to $4 million of impairment of investments and $1 million to $2 million for restructuring including redundancies. In total this is $16 million to $20 million of impairments and provisions.

With all of these changes, the company confirmed that the company remains in compliance with its banking covenants.

The company is also looking to save between $10 million to $13 million in annual operating costs with its head office and operating cost base. This will be implemented in FY19.

Mr Hickey commented on the outlook “I am confident that, following this review, Greencross remains well placed to successfully execute our integrated petcare strategy”. He said that earnings growth would resume in FY19 after focusing efforts on the above areas.

Foolish takeaway

That’s a lot to take in for a Greencross shareholder. The company did say it would give further details in time. Quite a few of these impairments could be due to a new CEO coming in and wanting to get rid of any future writedowns at the start of his leadership.

If these changes do help Greencross’ long-term earnings then any short-term pain will hopefully be worth it. The company expects underlying EBITDA of between $97 million to $100 million this year, which compares to underlying EBITDA of $97.5 million in FY17.

The fall in share price is probably justified for the FY18 result. It’s hard to gauge what Greencross’ longer-term growth prospects are after this update. Investors wanting a piece of Greencross could jump on today’s lower price, but it could go lower over the next few months.

Investors may want to just invest in one of these top stocks instead to avoid the uncertainty.

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Motley Fool contributor Tristan Harrison owns shares of Greencross Limited. The Motley Fool Australia owns shares of and has recommended Greencross Limited. 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 Scott Phillips.

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