Shares in cleaning products retailer Godfreys Group Ltd (ASX: GFY) have fallen 19% to 40 cents in today's session following the release of a trading update that was well below expectations.
A weak update
Godfreys announced that the company's conversion program will slow to a rate below previous expectations as management focuses on improving the group's core business in order to maximise the sale value of future franchise conversions.
Only 2 or 3 store conversions are now projected for FY18 which are expected to contribute between $0.5-$1.0 million in EBITDA.
The revised update is well below initial expectations of more than 15 store conversions with an EBITDA contribution of around $4.5 million. In FY17, 22 store conversions occurred which resulted in an EBITDA contribution of $5.7 million.
With fewer store conversions projected for FY18, EBITDA is now expected to be between $3.5 million to $4 million lower.
With increased online competition and consumers battling weak wages growth and rising utility bills, traditional retailers are facing difficult trading conditions with Godfreys another in a growing list that is struggling to maintain its top line.
The company also revealed that like-for-like store sales during October and November were volatile and below expectations. Management however does expect an improvement over the crucial Christmas trading period.
Foolish takeaway
Long term shareholders of Godfreys have suffered with the stock now trading at 52-week lows and well down from the $2.75 float price in December 2014.
Godfreys is another example of an iconic Australian retail brand that was sold to private equity and has subsequently disappointed upon listing on the ASX.
In FY17, the company saw its revenue decline 2.9% to $174.1 million and lower margins contributed to a 19.8% reduction in underlying EBITDA to $14.1 million.
A $24 million impairment charge against goodwill resulted in the company suffering a net loss of $18.4 million. Today's announcement infers that the underlying performance of the business will be worse in FY18 and investors should consider looking elsewhere for companies with more compelling growth prospects.
