Combination pet retailer and veterinary services provider Greencross Limited (ASX: GXL) has thrown off any lingering market doubts about its performance after a stunning full-year results release this morning.
Here are the highlights:
- Revenue up 75% to $644.5m
- Underlying Earnings Per Share (EPS) up 43% to 34.3 cents per share
- Dividends up 36% for a total of 17 cents per share
- Like-For-Like ("LFL" or "same-store") sales growth of 6.2%, up from 6% in 2014
- Retail store numbers up 48% to 200, vet clinic numbers up 19% to 132 (total increase of 35%)
- Number of Grooming Salons jumped from 31 to 42, and DIY dog washes up from 57 to 104
- Nascent online offering makes up ~1% of total sales but grew at 80% in 2015
- Free Cash Flow (FCF) was negative $219m (more on this below)
- $29.6m cash at bank, undrawn debt of $95.4m and average time to debt maturity (repayment date) of 3.95 years
So What?
While it was a strong set of results, acquisitions delivered most of the juice – group revenue growth was 18.5% if the City Farmers acquisition is excluded. Greencross also acquired three clinics in Wellington, New Zealand, as part of its overseas expansion.
There are two things to take away from today's release. First, Greencross shows that it is not a "roll-up" business as it is delivering strong LFL sales growth even without the acquisitions.
(More on this can be found in my earlier article "Why the market has Greencross wrong")
Secondly, acquisitions are necessary if Greencross is to live up to its potential. Greencross has shown that its expenses increase at a slower rate than its revenues (indicating the presence of 'synergy' or 'scale' benefits) when it makes acquisitions.
More importantly, company figures show that customers spend a significantly greater amount when they have access to more than one Greencross 'proposition' (retail, vet, or grooming services). This is why Greencross aims to co-locate more and more stores.
The biggest drawback for investors is Greencross' liberal use of cash for its acquisitions. After profits and capital expenditure (acquisitions) are taken into account, Greencross burnt $219m in the past year. Include the benefits of a capital raising and the company still had a cash outlay of $91m which was funded by debt.
However, more stores deliver greater benefits of scale and are key to the company's plan to own 20% of Australian market share (8% currently) over the medium term.
With fewer acquisitions planned for this year, Greencross will spend less cash and management has indicated that gearing should reduce and the company be able to self-fund its growth in the next few years.
Now What?
Greencross management also offered guidance for 2016:
- Opening 20 new retail stores
- Establishing 12 co-located clinics
- Making vet acquisitions representing $20m in revenue
- Group Like-For-Like sales growth has been 6.2% so far for 2016 (Vet 5.5%, Aus retail 5%, NZ retail 9.3%)
I recently bought Greencross shares anticipating something like today's result, although the actual performance was better than I expected.
As I wrote then, there are several key risks I'm watching over the next couple of years. The first is cash flow; Greencross carries a lot of debt and continued negative free cash flow has to be filled either by debt or dilutive capital raisings.
While I am satisfied with its growth strategy and potential, the ability to self-fund its growth after the next two to three years is vital to my investment thesis.
Second is the ability to weather a downturn in consumer sentiment if unemployment rises and wages stagnate or fall (which I expect to happen over the medium term). Australian vet and retail sales growth have been weaker so far in 2016 which Greencross attributes to a 'reshaping of promotional activity'.
Six weeks into 2016, it's too early to evaluate if Greencross will experience slower sales growth this year but it is something to keep an eye on.
In the meantime I think investors can relax and enjoy a solid performance with the promise of more in the future. It's a good day to be a Greencross Limited shareholder.
