Electronics retailer Dick Smith Holdings Ltd (ASX: DSH) dropped 15% in morning trade after reporting full year earnings (before significant items) of $79.3 million, up 7.3% over the prior year. The price crash looks something of an overreaction to a modest result and outlook.
The earnings growth of 7.3% was before "restructuring charges" of $7.9 million and is at the lower end of the range that the company was expecting, although was consistent with guidance. The backing out of staff restructuring costs is somewhat dubious as they are arguably part of the ordinary course of business for all companies of a decent scale from time to time.
Total sales were $1.32 billion, up 7.5% over the prior year, although total comparable sales were only up 1%, as comparable sales in New Zealand slumped 6.9%, which was a result blamed on increased competition and soft consumer sentiment across the Tasman.
Australia remains the core market with comparable sales up 2.4%, with the faster earnings growth consistent with the group's strategy to focus on higher margin sales. The Australian gross profit margin was flat at 24.9%, with the company stating the Australian profit margin grew 22 basis points in the second half on the back of an improved promotional and product mix.
The company aims to grow organically and via store growth with plans to have 420-430 stores in operation by financial year 2017. Currently it has 393 stores in Australia and New Zealand, with the shift to the Move by Dick Smith format reportedly successful at the retail space leased from Sydney Airport Holdings Ltd (ASX: SYD).
Dick Smith and electronics retailing rival JB Hi-Fi Limited (ASX: JBH) have been two of the better performing retail stocks in 2015, with JB Hi-Fi up 30% over the year to date. The electronics good space is likely to continue to enjoy tailwinds in the years ahead, but is competitive as both businesses seek to diversify into retailing kitchen appliances and other white goods.
One touted area of growth over the long term is connected to the potential of the 'Internet of things', where the next generation of home appliances are operated via internet connected smart devices such as mobile phones.
Dick Smith is already selling kitchen products manufactured by Breville Group Ltd (ASX: BRG), which is a business with ambitions to manufacture kitchen products with online connectivity that would please the idle masses by allowing kettles to be switched on with an iPhone for example.
Dick Smith forecast 2016 net profit would be between $45 million to $48 million, which when adjusting for significant items in the current year would represent around mid-single digit percentage growth when towards the middle of the forecast range.
The full year dividend totaled 12 cents per share from full year earnings of 16 cents per share. This reflects a payout ratio around 65% of (adjusted) earnings and puts the group on just 11.5x trailing earnings and a yield of 6.5% when selling for $1.84.
This looks reasonable value on paper and more so given the company is forecasting mid-single digit profit growth in the year ahead, when adjusting for 'restructuring costs' in the 2015 financial year.
