A head for growth?

Shaver-shopInvestors with an enthusiasm for retail stocks copped another haircut just before the heavily whiskered Santa Claus set off on his rounds.

While The Shaver Shop might describe a sharp decline on its share price as a trim rather than a crewcut, investors have learned yet again that the retail industry is not for the faint-hearted.

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The Shaver Shop’s share price dropped as low as 69c but have shown some regrowth in the new year to around 80c, which is still more than 20 per cent down on the issue price when the retailer listed on the Australian Stock Exchange last July.

The current price is also well below the $1.22 mark recorded in August and again in early September when the retailer was indicating it was on track to meet the sales and earnings forecasts included in the prospectus for its public float.

The Shaver Shop, which is a specialty retailer of male and female personal grooming products with stores throughout Australia and New Zealand, was quite confident about the outlook both in August and October.

However the October announcement surprisingly revealed the retailer had not budgeted for any outlays on its expansion plans, which included both new greenfield site stores and buying back franchise outlets.

Given that the two-pronged expansion plan was critical to growth, the October caution that the capital spending had not been budgeted for was no doubt a shock to many investors.

At worst, most investors would have expected the expansion strategy would have been funded under a budgeted provision to draw down a $23 million debt facility revealed last August.

The Shaver Shop may well have negotiated better terms on its debt – at least you would hope so, otherwise securing the $23 million in new debt facilities makes a mockery of the retirement of loans valued at $15.2 million following its July listing on the Stock Exchange.

Indeed the creation of the debt facility to pay for store development probably raised investor eyebrows in itself, as the private owners of The Shaver Shop had previously indicated the proceeds of the $98 million public float would be used to pay down the $15 million of its debt and to fund the opening of 45 new stores over the next three years.

The initial clearance of $15.2 million of debt by the company had actually still left $2 million of borrowings but the question is what has The Shaver Shop done with the remaining $83 million, a proportion of which was apparently to be directed to store development?

Investors have been unable to ask any questions about their stock in formal meetings as directors of The Shaver Shop decided the retailer need not convene an annual meeting as it had only traded as a public company since 1 July 2016.

The October statement issued by the firm to the ASX was a trading update by the retailer in the absence of a shareholder meeting, but it left a few institutional shareholders and analysts a little uneasy about the financial situation.

The Shaver Shop started 30 years ago as a repair shop for electric shavers, but owner Gary Tyquin developed a retail format for shopping centre locations that allowed the business to expand its store network over the past two decades and build a recognised brand as a specialty chain.

Tyquin sold the chain in 2011 to a group of investors led by investment banker and Melbourne Racing Club chief executive, Brodie Arnhold, who is now the chairman of the retailer.

While The Shaver Shop public listing was not a private equity exit, investors and analysts are becoming concerned about financial management policies and governance after the spectacular Dick Smith collapse in January last year and, before that, profit manipulation in Target, the Wesfarmers-owned discount department store chain.

IRW doesn’t conclude that there is anything untoward in the financial management of The Shaver Shop and notes that the Boxing Day and New Year sales may have improved the trading outlook issued on 23 December to warn that Christmas trading had not met expectations.

The Shaver Shop indicated in December it would provide a further update “in due course” after noting that, like many retailers, its annual results have significant reliance on a successful Christmas trading season.

The Shaver Shop said sales for the half year ending 31 December 2016 are expected to be lower than previously anticipated, and below those assumed within its prospectus forecast in the month of December.

The retailer said sales were on track with forecasts up to the end of November and were bolstered by revenue from three franchises that had been bought back and four new greenfield stores.

Sales of around $29.5 million had been expected for December but were revised on 23 December to between $26.5 million and $28 million due to weaker sales in key gift giving lines in the hair styling category and the closure of the Queensgate store in New Zealand following the recent earthquake.

Arnhold said sales in other categories had been strong, but had not been sufficient to offset weakness in the hair styling category, pointing out that like-for-like sales were up 4.5 per cent if the Queensgate revenue and hair styling were excluded.

“We believe that the softness in trading, relative to expectations, is isolated to a small number of issues and remain confident that our organic growth, buyback and greenfield expansion strategies will lead to increased shareholder value over the medium to long term,” Arnhold said.

The Shaver Shop has promised significant growth over the next three years based on the expansion of its store network from 100 to 145 outlets and buying out franchises.

The 100th store opened in June last year, the month before the retailer joined the ASX, one of 16 new stores added in the 2016 financial year.

Snipping back stores

Like Beacon Lighting and Godfreys, two specialty chains that listed on the ASX, The Shaver Shop is scaling back its franchise system.

After some indifferent trading results, Godfreys, the vacuum cleaning chain, changed it direction late last year and has now decided to rebuild its franchise system as its future growth strategy.

The Shaver Shop is keen to capture the sales and earnings of the franchise outlet it still has operating and expects it will have at least 92 corporate stores out of 108 locations by the end of the current financial year.

The retailer has already signed deals for three unbudgeted franchise buybacks and four unbudgeted greenfield sites since its public float.

Arnhold cautions the greenfield sites are not expected to contribute to earnings for at least two years but will add revenue, while the franchise sites bought back by the retailer should generate profits and be expected to provide a return on the capital investment and debt servicing of the acquisition.

In the last financial year, The Shaver Shop booked sales of $106.7 million with like-for-like total store network growth of 10.7 per cent and net earnings of $7.5 million, excluding all but the interest costs associated with preparing for the public listing.

Interestingly, like-for-like sales in corporate stores for the 2016 financial year were 9.2 per cent, slightly less than the 10.7 per cent achieved by franchisees.

A head for growth

Cameron Fox, The Shaver Shop CEO, says the company is confident about its future growth prospects with the store development and category enhancements and expansion that include wet shave, hair styling and power oral care products.

Fox said The Shaver Shop trades in market segments worth more than $1 billion in Australia and the hair removal and personal grooming market is large and growing, underpinned by long term structural drivers, such as the increased consumer desire to look and feel good, as well as continued product innovation.

“Shaver Shop is at an exciting stage in its development because without changing the strategy, we can still see significant opportunity for growth of the business in Australia and New Zealand,” he said.

Fox claims The Shaver Shop is the leading retailer in its category and has a competitive edge with its product knowledge, customer service and relationships with global manufacturers to source the latest products, many of these on an exclusive basis.

Fox said the business model is evolving to appeal to a wider customer demographic and the franchise outlet buyback is allowing the retailer to steadily and strategically expand its geographic footprint while maintaining a consistent retail offer and customer experience.

The Shaver Shop was asked by the ASX for an explanation for the sharp drop in its share price and a high volume of shares traded on 22 December.

The query no doubt prompted the 23 December trading update to ensure investors were fully informed, however, the retailer told the compliance advisor at the ASX that it was not in breach of any listing rules.

The Shaver Shop said the increased volume of shares traded may have been related to a significant shareholder who had lost an investment mandate, requiring the forced realisation of some shares, however it was not able to confirm that situation.

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