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Stock Of The Day - GREENCROSS (BUY)

In today’s daily we cover Greencross (GXL), which is Australasia’s largest integrated consumer facing pet company. It owns and operates Australia’s largest network of veterinary practices with over 115 clinics including general practices, specialty and emergency centres, pathology labs and pet crematoria. Greencross Retail is Australasia’s leading specialty pet care retailer with over 175 stores, operating under the brand names of Petbarn and City Farmers in Australia and Animates in New Zealand. In addition to selling pet food and accessories through its store network and online platform, Greencross Retail offers a wide range of pet services including grooming, dog washing, boarding and pet adoption. GXL presented an update on 2015 performance to investors in May 2015, whose main highlights were an increase in store and clinic network with company now being twice the size it was in 2014.


Pet Care Market (Source - Company Reports)

The company increased the size and store network by 33% taking the total number of outlets to 329. It acquired 42 city farmer stores and integrated them into its network and established a further 26 stores. The country is on track to open its 200^th retail store in May. The company purchased 18 vet clinics expected to deliver over $31 million of annualized revenue, taking the total number of clinics to 130. The key metric is that the company can now reach 59% of ANZ pet owning families. The company will be making further acquisitions to increase its reach, particularly in the New Zealand market.


GXL's Positioning (Source - Company Reports)

The overall addressable market of GXL is estimated to be of $9 billion in size and is growing at a rate of 4% per year. GXL currently has 8% of this market share. GXL aims to offer its customers full spectrum of pet care products and services enabling it to support their pet’s entire lifelong needs. With this value proposition it aims to capture 20% of its addressable market. The company aims to increase its retail outlets from present number of 199 to anywhere between 325 and 375 stores. GXL’s private label penetration is now at 15% and the company expects this number to increase and reach 25% in the long term. 


Average Customer Spend (Source - Company Reports)

The company has demonstrated a strong track record of growth in the last four years. The company’s EPS grew by 2 times over the same period. 


Key Metrics (Source - Company Reports)

In addition to the growth in EPS over the period ranging from FY11 to FY14, the revenues grew from 231 million to 445 million at a CAGR of 24%. Over the same period the EBITDA of the company grew from 25 to 54 million at a CAGR of 29%, and the NPAT of the company grew from 6.6 to 21.6 million at a CAGR of 48%. The key drivers of the company’s growth strategy going forward are going to be:
 

• Deepened consumer engagement through holistic pet care offering including optimized loyalty program, cross promotion, extended range of services and exclusive brands
• Further development of complementary retail and services model providing clear differentiation for customers, this will include co-location of veterinary and retail offerings
• Improved operational efficiencies and return on investment across the group through spread of best practices, benchmarking and enhanced controlled framework of systems and processes
• Continued strong inorganic growth through acquisitions across all sub segments of pet care market 

GXL Private Label (Source - Company Reports) 

Another driver in the sales growth in the coming years will be maturing of the current fleet of stores. A store takes 5 to 6 years to mature, while approximately 75% of current store outlets are less than 4 years old. As these stores reach their maturity the revenues from them is expected to increase. A part of company’s strategy is to reduce cost of doing business as it increases scale. The expected synergies from various mergers and acquisitions include not only revenue and retail presence but also cost synergies. 


GXL Daily Chart (Source - Thomson Reuters)

GXL has financed its growth through a mixture of debt and retained earnings. With time, it will reduce the dependence on debt, and will finance more and more growth from internal earnings, which will lead to reduction in the leverage ratio. According to company’s estimate, GXL will need a capital expenditure of $50 million every year. Company has $350 million debt facility in place out of which $90 million is still undrawn. Maturation of fleet is also expected to improve the cash flow situation. The company plans to self fund its entire growth by 2017-18.

The company is currently trading at a price of $6.940, at a dividend yield of 2.14%. At this price stock is trading close to its 52 week low of $6.140.  

Given the attractive growth possibilities of GXL stock we believe that the stock is worth buying at the current price of $6.940.