Godfreys: charting a path to growth
Godfreys managing director John Hardy may have missed his moment in the sun with investors due to a bout of the flu last week, but he and CFO Andrew Ford will nevertheless be buoyed by the response to their efforts over the last 12 months.
Shares are up more than eight per cent on a stabilisation of declining comparable sales at negative seven per cent and $14.1 million in earnings before interest, tax, depreciation and amortisation for the year ended June 30.
It was only two months ago that Hardy decided to downgrade his earnings forecast to the $14-$15 million range, prompting a fresh set of concerns from analysts about the future of a vacuum specialist with 222 stores in modern Australia.
But while $100,000 was all that separated Hardy from missing that revised figure, the market proved that it respects a promise kept – something that Domino’s boss Don Meij will no doubt be reflecting on this week.
There’s a splinter of light shining through the end of Godfrey’s new range of stick-vacs – a hope that Chairman Rod Walker made the right decision in bringing Hardy, who was the face of Godfreys for 27 years until 2010, back into the driver’s seat last year.
Hardy is a retail veteran who’s turned more than one retail operation around, but Godfreys has required extensive house cleaning after former BigW buying manager Kathy Cocovski’s six-month stint behind the wheel.
Hardy has bet big on franchising as the path back to positive earnings growth for the company, having handed the keys to 22 stores over in FY17, bringing in $5.3 million in franchise fees.
The shift, which has occurred faster than expected in the last 12 months, has brought the proportion of franchised stores in the network to 45 per cent.
Franchisees solve a variety of problems for Godfreys, from lowering the financial burden associated with an extensive bricks-and-mortar presence in a niche retail segment to bringing in entrepreneurial values that can help the brand remain relevant to modern consumers.
There has been no target provided for the proportion of the network Hardy wants to franchise, nor any indication that Godfreys will be expanding its total portfolio, meaning that further conversions are likely to increase the proportion of earnings derived from non-company operations in the coming years.
That’s good news, considering that those stores that have already been converted are experiencing a material improvement in sales – but there’s a long way to go before Godfreys manages to pull itself up and the current retail market is no friend to most comeback stories.
Hurting it will be the curious indication that franchisee conversions will slow in FY18, reducing the revenue reaped from fees and limiting the positive impact on comparable sales. The company has opted to give no specific guidance, but signalled this deceleration as a reason behind a prediction that earnings would not materially improve in FY18.
The comeback kid
There are question marks over how Hardy will be able to navigate the landing of Amazon and the uptick in competitive pressure that’s likely to cause among competitors like JB Hi-Fi and Harvey Norman, which have both managed to grab market share in the $1.3 billion market from the specialist in recent years.
JB Hi-Fi Group CEO Richard Murray was clear last week in saying that JB will look to lead on price, and Gerry Harvey’s views on the matter are well-known – signalling headwinds for Hardy, who is in a less than ideal position to bring margins to the razor’s edge after years of heavy discounting.
Product is coming around though, with stick-vac comparable sales growth of 75 per cent, evidence that Hardy has better aligned the company with the shift away from traditional barrel cleaners, positioning the company to begin getting ahead of the curve.
Fourteen new products were introduced during FY17, with a focus on lightweight stick vacs that retail at a lower price point and are more flexible for an increasing amount of consumers with smaller houses and more frequent moves.
Dyson is still missing from the mix though, a continuing sore point for a company that retail expert and Queensland University of Technology associate professor Gary Mortimer reckons has diluted Godfrey’s value proposition.
“If discount department stores are selling Dysons, then they are beating you at your own game,” he said. “What’s your value proposition if consumers can get a Dyson from Target?”
Instead, Mortimer argues that Godfreys’ best bet is to align itself to a premium market niche, sacrificing scale for profitability by exiting a portion of its portfolio.
“[Godfreys] has to understand what its niche is…look at Bang and Olufsen, which also has a niche range,” he said. “The future might be aligned to high-end premium cleaners. Market withdrawal is not necessarily a bad strategy, because it enables you to become a more profitable business.”
Godfreys’ network will come in handy when Amazon lands though, especially with the recent roll-out of click-and-collect services through the network in an effort to drive better conversions from online-to-store.
Marketing is also becoming increasingly digital, a goal that Hardy had signalled as a priority when he came back to the business.
Godfreys was once well-known for its television advertising, often featuring Hardy using a vacuum cleaner, sucking up all manner of variously weighted objects, but these days bloggers and social media are playing a bigger part, as the brand looks to detach itself from its old and tired image that appears to have continued.
Whether the revitalised product range and marketing strategy gears up Godfreys’ competitiveness remains to be seen, but while more diversified retailers struggle with earnings headwinds in categories more closely tied to housing and consumer confidence, Hardy can at least take solace in the fact that keeping the floor clean is a grudge purchase.