The Greencross Limited (ASX: GXL) share price has fallen a further 4% this morning, to add to the 20% or so drop yesterday.
It's been a painful couple of days for Greencross shareholders, so the question is, what now?
Firstly, Greencross said that it expects to provide an update to the market on Greencross' corporate strategy at an investor day briefing. So, hopefully we will get some more information then.
For me, there are a few different considerations:
Still growing revenue
I thought the trading update was pretty positive. If a company isn't growing revenue then there's a good chance that business could start sliding out of relevance. It's very hard to grow profit if the revenue isn't growing.
Greencross reported total sales growth of 9% and group like for like (LFL) sales growth of 4.5%. Indeed it was good news almost across the board with retail, total Australian vet and New Zealand all reporting LFL growth. But, there was one negative.
Standalone GP LFL sales decline
Apparently this segment recorded a sales decline of 2.8%, which came about from a 4% decline in visit numbers. Greencross didn't really say why this happened, so I can only speculate.
Perhaps competition is increasing from National Veterinary Care Ltd (ASX: NVL), perhaps people are now taking their vets to the in-store vet, rather than the standalone vet. Perhaps management just took their eye off the ball and didn't do enough to bring in pet owners.
Management did say that vet visits had stabilised, but it is now implementing several strategies to increases visits such as enhanced cross referral programs, a focus on the Healthy Pets Plus membership and more marketing. These measures won't be felt until FY19.
Impairments and provisions
When a new CEO comes in they often like to 'clear the decks', get rid of any cobwebs and start with a new slate. Mr Simon Hickey certainly seems to have done that, with $16 million to $20 million of non-cash write-offs.
Only management and the accountants would be able to say how 'aggressive' the write-offs were. Maybe the write-offs were essential and should have been done earlier. But it should hopefully mean FY19 will register a lot higher growth than previously expected due to FY18's lower result.
Debt
This is one area that management and investors need to monitor. Debt and interest charges can overload a company and Greencross will need to remain within its debt covenants.
I think it's a good move that Greencross is getting rid of its short-term debt facility.
Is it a buy?
Greencross still appears to be forecasting a sizeable net profit after tax this year. It's not as though these provisions will put the pet company into a loss position. I'm a little less enthusiastic about Greencross than I was a week ago, but I think these moves should lead to higher profit growth in the medium-term.
If the share price stays around the current level (or lower) over the next few weeks, I think I will likely add to my Greencross holding.
