Company Overview - Dick Smith Holdings Limited is an Australia-based company engaged in retailing of consumer electronics. The Company operates in two geographical segments: Australia and New Zealand. The Company has 359 stores across Australia and New Zealand. Its store network consists of, in Australia, 267 Dick Smith stores, 30 David Jones Electronics Powered by Dick Smith stores and one Move store concept, and in New Zealand, 61 Dick Smith stores. Dick Smith operates an omni-channel platform consisting of consumer electronics physical store network in Australia and New Zealand, online shops, mobile shops, mobile apps and click-and-collect. Dick Smith connects with its customers through three physical store formats, catering for three distinct consumer demographics: Dick Smith, David Jones Electronics powered by Dick Smith and its Move store concept. The Company offers these products across a range of brands as well as a Dick Smith private label brand.

Analysis - Dick Smith Holdings (DSH), the major retailer of consumer electronics with the largest by store footprint in Australia and New Zealand reported FY2014 retail sales that positioned the Company in the top three with revenues exceeding $1.2 billion. DSH reported strong results for the half-year ended 28 December 2014 on the back of its growth strategy which showed accelerating momentum. Total sales at $ 693.8 million compared to $ 637 million in the previous half year grew by 8.9% while growth in comparable sales was 2% and particularly impressive in Australia where the figure was 4%. EBITDA grew by 7.1% ($ 44.7 million in this half-year compared to $ 41.7 million in the previous half year) and the jump at 16.1% was noteworthy in the case of Australia. The NPAT of $ 25.2 million grew by 0.8% compared to $ 25 million in the previous half year. The interim dividend payable on 30 April 2015 is of the order of $ 0.07 per share. The dividend came to around 66% of NPAT which is in line with the overall corporate sector of keeping dividend payouts in the range of 60% to 70%. The Company aims at achieving the goal of 400 new stores in FY15 and 11 stores have already been opened in 1HFY15.



Profit and Loss (Source – Company Reports)
 
DSH reported gross margin coming in at 24.7% (compared to 25.3% in the previous half year), with the gross margin in Australia remaining strong at 24.9%, despite more difficult business conditions. New Zealand’s gross margin was slightly lower at 23.4%, because of the more competitive market and increased promotional spending. Thus, we note that the solid sales growth was pulled down by lower gross margins to some extent. The Company continues to extract cost efficiencies and savings, resulting in Cost of Doing Business (CODB) declining by 0.41% to 18.3% of sales in this half-year. Interest and depreciation charges increased because of the effective implementation of the growth strategy.
 

The Company’s strategy entails to have profitable growth in sales by delivering to consumers the products of their choice at affordable prices using locations and platforms most convenient for them. This is being implemented by giving consumers the choice of shopping at an unparalleled network of 385 stores throughout Australia and New Zealand as well as an online purchasing experience delivered through multiple platforms. Since the launch of the growth strategy 18 months ago, the Company has opened 65 new stores and grown as the fastest growing consumer electronics store network in Australia with 11 stores opened in first half of 2015 and a further 9 new stores planned for the second half of 2015. The segmentation of the network into three new formats catering to different demographics has attracted new demand as well as increased brand awareness and improved consumer perceptions. Online sales have grown from 5% of retail sales in the previous half year to 7% in the current period and the Company is confident of achieving its objective of 10% before the stipulated date of financial year 2017. The private label sales have also shown encouraging results amounting to 12% of retail sales for the half-year and the Company is well positioned to achieve its goal of 15% by the financial year 2017.

 


Store Network (Source: Company Reports)
 
As mentioned above, the Company achieved a gross profit margin of 24.7% of sales (25.3% in the previous half year). The gross margin was well protected through product mix and Private Label sales though the gross profit was hit by a 2.01% decline in the New Zealand gross margin due to the significant increase in competitive activity and a deteriorating retail market. The Company continues to focus on achieving cost efficiencies throughout the business and CODB in the first half of 2015 was 18.3%, down 0.41% on the previous period. The reduction was because of the benefits of the amalgamation of the New Zealand support office into Australia in February 2014, which resulted in New Zealand’s CODB reduce by NZ$2.1 million along with increased efficiency initiatives in Australia and fixed cost leverage resulting from the new stores opened in Australia. The reduction was achieved despite the negative effect of approximately 23 basis points arising out of the softness in New Zealand sales.
 


CODB (Source - Company Reports)
 
We like DSH’s strong balance sheet with no outstanding debt as at 28 December, 2014 indicating the conservative approach to leverage. Inventory was strongly controlled throughout the period and the increase in inventory levels places the Company in a strong position to continue sustainable growth. This includes the continuing opening of new stores and expansion of Private Label brands, utilising warehousing capacity in Sydney and Auckland to reap the benefits of favourable currency movements and catalysing future growth including five new ‘MOVE by Dick Smith’ locations at Sydney Airport. The Company also took advantage of a number of opportunities in January/February, which necessitated purchasing inventory prior to the peak Christmas season.
 
The sales performance for the second half of 2015 so far has been superior to the 8.9% growth in the first half despite the continuation of difficult trading conditions in New Zealand. January sales are up by more than 17% and February sales have been shown to have double-digit growth. Total sales growth in the year were recently reported to be more than 10% and comparative sales growth has been around 3%.Nick Abboud, Dick Smith Managing Director & CEO, expects to achieve a minimum of 10% growth for the financial year 2015 and believes that the Company is well placed to deliver further strong sales and profit growth over the next 18 months. In addition to the Sydney Airport Duty Free stores that commenced lately, the Company intends to open 9 new stores in 2H 2015 and 20 new stores in FY2016. In FY2015, EBITDA growth of 7-9% and NPAT and EPS growth of 3-5% has been estimates, which in a way reflects the continued investment in future growth opportunities.




Online Sales (Source – Company Reports)
 
The Company unveiled its latest cost-cutting initiatives in the third week of March 2015 by announcing about elimination of 80 jobs from its head office, IT and supply chain management. This is the latest response to the generally weaker trading conditions reflected in the up-to-date half yearly results and is expected to generate cost savings of between $ 8 million and $ 12 million as of July 2015 though there will be one-off costs associated with the initiative. The Company expects that the initiative will keep it on track in achieving the objective of slashing cash costs of doing business to around 18% by the financial year 2017. Increased revenues from rolling out new stores and strategy to focus more on low-cost online sales appear to be fruitful for DSH.


Profit and Loss_Australia (Source – Company Reports)
 
Overall, positive results for the first half year, increase in dividend yield and the positive outlook on sales growth look appealing. Growth in EPS is expected in long term from the opening of additional new stores, cost-cutting initiatives, the increasing share of private brands in revenues and a greater share in revenues of lower-cost online sales.
 

DSH Daily Chart (Source - Thomson Reuters)

We believe that the future growth prospects are attractive on a realistic basis and the focus on private label sales and online sales will improve gross margins especially when combined with the continuing cost savings. We also believe that the Company will be able to overcome the weakness in share prices seen over the past few months owing to the soft retail environment in Australia and New Zealand as well as the difficult trading conditions in New Zealand. Despite these concerns, DSH has taken proactive and aggressive measures to continue the upward trend of revenue growth. In fact, we believe that the recent share price weakness has created a buying opportunity.
 
Accordingly, we put a BUY recommendation for this stock at the current price of $1.97.



 

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