Share prices in the electronics retailer closed down 16.75% after it reported its results for the full year. Obviously, the results were not what the market was expecting even though they were positive and the markets seem to have overreacted.
Full-year results FY 2015
Among the highlights of the results were a growth in total sales of 7.5% to $ 1.31 billion and a 1% increase in comparable sales Australia up by 2.4% and New Zealand improving. Gross profit was up by 6.1% and gross margin was 34.8%. EBITDA grew by 7.3% to $ 79.8 million on a decrease in cost of doing business by 32 basis points to 18.7%.NPAT was up 3.1% to $ 43.4 million and the fully franked final dividend is 5 cents per share. There was an improvement in the second half of FY 2015 when sales grew by 6%, EBITDA by 7.4% and NPAT by 6.3%. Performance in Australia remained strong with sales up by 10% and EBITDA by 21.9%. The company sees the result as its growth strategy delivering.
Profit and loss
Sales grew 7.5% from $ 1.22 billion to $ 1.32 billion. The strong growth in sales was driven by airports and new stores although growth was impacted by the conscious decision not to chase low margin sales particularly in the fourth quarter of the financial year. Online sales were in excess of 8% compared to over 4% in the previous year. The key categories of office and entertainment performed well over the year. Gross margin was down by 33 basis points to 24.8% influenced by competition in New Zealand and the online mix although private label growth was beneficial. EBITDA growth was 7.3% to $ 79.8 million though the margin was down by 1 basis point to 6%. This was consistent with the guidance and the underlying growth in cost of doing business (wages and rent) remained below the inflation rate. The sales decline in New Zealand had a negative impact of 28 basis points on the EBITDA margin. EBIT grew by 5.5% to $ 65 million, interest showed an increase of 168.8% to $ 3.7 million because of the strong investment in future growth and NPAT grew by 3.1% to $ 43.4 million. EPS grew by 3.2% to 18.4 cents per share and the dividend per share grew from 8 cents per share to 12 cents per share with the payout ratio of 65% consistent with the guidance range of 60% to 70%.
Performance in Australia was particularly strong with a 10% growth in sales to $ 1.15 billion and comparable sales growth of 2.4% compared to 0.8% in the previous year. The company gained 60 basis points in market share primarily in computers, TVs and audio equipment. Airport and online sales performed ahead of expectations. Gross profit grew by 9.8% to $ 287.7 million while gross profit margin was down by 4 basis points to 24.9%. Despite the competitive market, increased promotional activity particularly in the first half of the year supported this performance and the performance of private label offset the negative impact of online sales on gross margins. Cost of doing business declined by 6% to $ 211.9 million and the underlying growth was below inflation with fixed cost leverage be driven by stores and occupancy efficiencies. EBITDA was up 21.9% to $ 75.7 million because of the strong leverage of sales growth. EBIT was up 22.6% to $ 63 million and the margin grew by 56 basis points to 5.5%.
New Zealand is showing signs of improvement even though sales declined by 6.9% to $ 166.6 million and comparable sales growth showed a negative growth of 7.01% compared to a negative of 14.3% in the previous year. Fourth quarter New Zealand customer confidence declined by 7% over the previous year but the rate of decline has continued to improve.. Gross profit declined by 14.9% to $ 39.1 million and gross profit margin shrank by 219 basis points to 23.5%. Gross margin was impacted by competitive activity particularly in the third quarter. Cost of doing business rose by 4% to $ 35 million and by 222 basis points to 21% as a percentage of sales. EBITDA declined by 66.8% to $ 4.1 million and EBITDA margin by 441 basis points to 2.4%. EBIT fell by 80.4% to $ 2 million as the margin declined by 449 basis points to 1.2%.
Sales performance
Online sales doubled because of the comprehensive customer multichannel experience and the availability of multiple platforms, store fulfilment and Pay and Collect from all stores. The key categories continue to be strong with Fitness and Entertainment being particularly notable. The currency impact has been limited because the company buys ahead of increases. Private labels have shown strong growth particularly in Dick Smith and MOVE branded products. David Jones sales were impacted by store closures as well as the reduced availability of space in key stores. New-product initiatives continue to drive comparable sales and Small Appliances are launching in 100 stores by the first half of 2016 and the private label range is expanding by 40%. 15 to 20 stores are scheduled to open in FY 2016.
Dick Smith Dividends (Source - ASX)
We believe that the market may have overreacted to the results announcement by hammering down the price. The company expects to make a net profit for FY 2016 in the range of $ 45 million to 48 million and the proposed new stores as well as the introduction of small appliances should give sales a boost. In addition, the company should also benefit from the expansion of private-label sales from 12% to 15% in FY 2016. While the results are modest rather than spectacular, we think that the share is currently undervalued and the recent downward movement provides for a buying opportunity. We would rate this stock as a Buy at the current price of $1.70.
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