Shareholders in small-cap veterinary services provider and pet care retailer Greencross Limited (ASX: GXL) have had a tense year as the company's valuation has plummeted.
Greencross delivered disappointing FY18 results, with underlying NPAT falling 14% and underlying EBITDA down 6%.
But with revenue up 7% and superior results out of integrated sites and strong sales momentum, investors were left wondering why margins were decreasing.
However FY18 profit was dented by a number of write-offs so there is hope the bottom line will look healthier in FY19.
Increasing its footprint
Greencross has grown at a staggering pace since 2014 with a strategy to grow the number of retail stores with in-store services – opening 17 in-store clinics over FY18.
This totals 54 integrated sites for Greencross, which accounts for 22% of its retail store network and in FY18 these stores delivered like-for-like sales growth of 8.5% as compared to 3.5% for stand-alone stores.
Greencross CEO Simon Hickey said the company's offerings are "unrivalled" in the $10 billion Australia and New Zealand pet care market, with the like-for-like sales growth figures giving Greencross management "confidence in our strategy to grow our integrated network organically".
Private Equity Interest
Rumours are swirling that private equity firms have their eye on Greencross, with The Financial Review naming TPG Capital and BGH Capital as the most likely candidates.
This could be one good reason to hold onto the stock for the time being.
Greencross has confirmed it has had discussions with a number of parties regarding takeover proposals.
FY19 and beyond
Greencross has started FY19 off strong, with sales growth on the up and 8% revenue growth already logged.
The company has plans to adopt a disciplined approach to investment and capital management in the medium-term, aiming to reduce total capex to $50 million while executing strategic priorities to improve operational performance and deliver earnings growth.
Risks
The overall risk for a player like Greencross is the longer-term issues with the likes of Amazon selling pet supplies and Petbarn aggressively discounting products to compete.
But as neither offer the same integrated vet clinic model as Greencross, its point of difference might be enough to keep customers onside.
Greencross has issued several loyalty programs to try to build customer interaction with a pet wellness program in the wings to mesh its vet care and product lines in a tailored manner.
Foolish Takeaway
While I would be too wary to buy into Greencross right now, I'd definitely hold onto my shares if I was already a shareholder. It will be interesting to see if TPG returns to make another offer for the retailer, but it remains to be seen whether it would be higher or lower than its original pitch. Either way, selling on a low isn't advisable and I think there is some upside to be realised in Greencross irrespective of takeovers.
Some other retailers to watch right now include Noni B Limited (ASX: NBL) and Lovisa Holdings Ltd (ASX: LOV).
