At a Macquarie conference earlier this month, Greencross Limited (ASX: GXL) released a detailed presentation on the company's situation and outlook. One of management's previous presentations was the catalyst for my picking up shares in the company, so I was understandably interested to see how things have evolved in the 10 months since then.
Here's what jumped out at me:
- Addressable market growing at ~3% per annum and approaching A$9 billion*
- Services (vet and pet services e.g. grooming) account for $4.1 billion or 47% of the $8.7 billion market
- Greencross holds 8% of this market, but is the largest single pet store and vet in the country**
- Currently has 221 stores and 155 vet clinics, plus 62 grooming salons
- Attractive economics to store co-locations ***
- Greencross is targeting 30 in-store vet clinics by end of Financial Year 2017
The latest presentation was 40 pages long, so I've had to be a bit selective in my focus for this article.
*Greencross previously suggested that the total market was growing at 4% per annum, so the latest figures of 3% suggest either that growth has slowed or that previous forecasts (in company presentation 6 May 2015) were inaccurate. In fact, Compound Annual Growth Rates (CAGR) of industry growth for Pet Food and Vet Services have been 2.7% per annum for the past five years. Online Pet Food and Pet Products grew at 16.6% per annum in the past five years.
** Greencross' nearest store competitor is the family-owned Petstock, with 127 stores compared to Greencross' 221. The closest vet competitor is National Veterinary Care Ltd (ASX: NVC) with 37 stores compared to Greencross' 155. This suggests to me that Greencross could have a competitive advantage and save costs by being able to cross-sell and co-locate its vet, pet, and grooming stores.
***Previously, the market has been concerned about Greencross' growth by acquisition. The company turned to co-locations to save on costs and drive sales, and the latest figures suggest this is more effective. Payback for co-locations is expected to occur in 3.5 years, compared to 4 to 5 years for acquisitions. Current in-store clinics are performing ahead of expectations and reaching profitability in their first year. However, a majority of the clinics were established in the past 12 months and it is early days yet.
There was plenty more to dig through, including a loyalty program, network expansion, increased sales of private label products, and so on – but they'll have to be covered in a future article.
Broadly speaking, it looks as though Greencross is following a similar path to that of the major supermarkets in the past few years, by expanding into parallel services and using its major attractions – vets and pet stores – to cross and up-sell to customers.
We know how effective that's been for Woolworths and Coles, but investors should be sure to take a closer look at the company's funding situation before getting too bullish. Previously, Greencross had been burning through cash and while performance is strong, cash losses can't continue forever. With that said, the latest presentation was a positive update and Greencross' business appears to be tracking well. I continue to be comfortable holding my shares.
