This morning, pet company Greencross Limited (ASX: GXL) reported its annual result for the year to 30 June 2018 showing an increase in revenue but a substantial fall in statutory profit.
Greencross' top line revenue grew by an impressive 7.5% to $878.7 million. A good portion of this increase came from the 4.9% like-for-like (LFL) sales growth on a 52-week comparison basis.
Australian retail revenue increased by 5% thanks to 5.1% LFL sales growth, this was underpinned by 3.1% LFL transaction growth and higher basket size. Australian online retail sales grew by 70% to over $20 million.
Greencross has been working on growing its private label sales, which now represents 23% of Australian retail product sales – private label food sales grew by 25% during the year. The retail gross margin increased to 47.9% in FY18 from 47.2% in the previous year. Australian retail underlying earnings before interest, tax, depreciation and amortisation (EBITDA) grew by nearly 5% to $74.4 million.
The Australian vet segment grew revenue by 12% to $240.8 million and achieved LFL sales growth of 4.3%. However, within this figure standalone GP clinic LFL sales declined by 2.2%, although the decline stabilised in the fourth quarter. The gross margin increased to 78.9% from 77.7% in the previous year.
The vet segment saw underlying EBITDA fall by 17% to $24.6 which Greencross attributed to three things. First, 'immature' in-store clinics have a short-term negative impact. Second, the impact of start-up losses in new emergency clinics and lower than planned GP clinic traffic during the first three quarters. Third, higher labour costs of $1.3 million in the animal referral hospital joint venture attributable to Greencross.
Greencross' New Zealand business had a solid year with revenue up 11% and LFL sales growth of 5.2%. The gross margin improved by 90 basis points to 50% and underlying EBITDA grew by 2% to $14.5 million.
Group underlying EBITDA fell by 6% to $97.6 million, underlying net profit after tax (NPAT) fell by 14% to $37.2 million and underlying earnings per share (EPS) declined 15% to 31.5 cents.
Greencross announced a number of impairments and provisions a few months ago. It amounted to $1.4 million of acquisition & due diligence costs, $10.7 million of impairments to projects, a $3 million provision for slow moving inventory, $2.7 million for redundancies & restructuring costs and $4.9 million of impairments of investments, stores & incidental provisions. All of these amounts weren't included in the underlying figures, however they impact the statutory numbers.
Statutory EBITDA dropped 25% to $74.8 million and statutory NPAT attributable to Greencross shareholders fell by 51% to $20.7 million. The statutory EPS fell 52% to 17.5 cents.
The fall in EPS sadly also meant a reduction of the FY18 dividend by 18% to 15.5 cents per share.
Net cash from operating activities fell and free cash flow was negative $9 million, leading to cash on the balance sheet decreasing and borrowings increasing. Net debt increased by $32 million to $268 million. The capital expenditure in FY19 will be reduced to $50 million by management. But this move shouldn't affect the expansion of stores, in-store clinics or vet acquisitions. The company is piloting smaller formats to lower capital costs and reduce the payback period.
At the end of FY18 Greencross had 247 retail stores, 106 standalone GP clinics, 54 in-store clinics, 37 specialist & emergency practices and 106 grooming salons.
FY19 outlook
In the first six weeks of the current financial year Greencross revealed that it achieved 8% revenue growth with 5.8% LFL sales growth. Within the LFL sales figure, group retail LFL sales growth was 6.1% and Australian vet LFL sales growth was 5.2%, with standalone GP clinics showing a decline of 0.5% LFL sales.
Management plan to grow the network by 3 to 5 stores and add 10 to 15 in-store clinics together with strategic acquisitions. The pet company is targeting annualised cost savings of $10 million to $13 million, with $5.8 million realised to date.
Greencross is also looking at opportunities to take private label products into Asia. Management will focus on operational performance to deliver revenue & earnings growth in FY19.
Foolish takeaway
The Greencross share price is up 2.7% so far today with the market seemingly liking the FY19 trading update.
Most of the bad news had already been factored in with the previous impairments announcement. It seems like the new CEO has cleared the deck and is starting with a clean slate for FY19 and beyond. Hopefully FY19 will be a bumper year for the company.
I continue to hold my shares and believe Greencross represents an attractive opportunity for the medium-term at 11x FY19's estimated earnings. I would be comfortable buying a parcel at today's price.
