Shaver Shop Group Limited (SSG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Shaver Shop 1H FY '20 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Cameron Fox, CEO and Managing Director. Please go ahead.

Good morning, ladies and gentlemen, and thank you for joining us today. As always, a presentation has been lodged with the ASX and is available from the Investor Relations section of our website. A recording of the presentation, together with the slides, will also be available on www.openbriefing.com shortly after today's call should you wish to refer back to any part of the discussion. In terms of our agenda for today, first off, I'll recap Shaver Shop's competitive advantages. These are helpful in providing some context around the key highlights from the first half and why we feel Shaver Shop remains very well positioned for future success. Larry will then take you through the financial results in more detail. We'll then summarize some of Shaver Shop's key priorities for the second half and provide a trading update and views on our 2020 outlook. Please also note our disclaimer around forward-looking statements contained in the appendix to this presentation. So moving on to Slide 4. Shaver Shop has been in business for more than 30 years. Over that time, our core values really haven't changed too much. Our primary core values evolve around customer service excellence, drive results, adaptability and accountability. These core values have been integral in establishing Shaver Shop's competitive advantage. We are a trusted retail brand with a unique retail model in a growing market. Men's personal care and grooming products are increasingly accepted as a necessary part of a man's daily beauty and hygiene routine, which clearly Shaver Shop benefits from. Whether it's an electric shaver, a beard trimmer, a beard straightener, a beard oil, a hair clipper, a body groomer, a grooming kit, Gillette razor, shave preparation, post shave product, skin moisturizer or even old school traditional shaving products, such as safety razors, shaving brushes and cutthroat razors, Shaver Shop sells it all. And often, our products are available only at Shaver Shop. Of course, we back this up with unparalleled levels of product knowledge and customer service levels. Notwithstanding our long-term heritage in men's personal care and grooming categories, today, Shaver Shop is positioned as a leading retail destination for both men's and women's personal care and grooming products with significant success around categories such as female hair removal, power oral care, hair styling, female beauty, portable massage products and skin rejuvenation. Understanding the technical nature of these products we sell and transferring this technical knowledge into language that resonates with our customers is where Shaver Shop excels. After 33 years of living and breathing personal care and grooming categories, it is fair to say that our team has established a very unique and deep understanding of our market. We continue to invest heavily in staff training to ensure our team remains product and category matter experts. The result is team members with unsurpassed product knowledge and providing excellence in customer service day in and day out. This is evidenced by our Net Promoter Scores, which are consistently above 80, which is world-class. There is also significant product innovation each year, which means our team work extremely closely and collaboratively with suppliers and move dynamically in order to ensure we have optimized promotional opportunities. These opportunities, in turn, require precision point alignment across our retail team and of course, our marketing communications. Ensuring Shaver Shop remains at the forefront of promotional opportunities and new product innovation is critical, otherwise, you can be left with stock that is slow to turn and a burden on cash flow. So the stock management process is a core strength of our business and is a key reason why our margins and our cash flows are so strong. It's also a reason why competition is quite fragmented with Shaver Shop being the only significant pure-play retailer in hair removal categories, supported by strong market shares and as I previously mentioned, the plethora of products that are available only at Shaver Shop. So with 122 stores across Australia and New Zealand, our ability to secure exclusive distribution of innovative products and our heritage in providing excellent customer service, Shaver Shop's unprompted brand awareness is very high and represents yet another competitive advantage for the business. That overview leads us to Slide 5. I am very pleased to report that Shaver Shop delivered record sales in EBITDA in the first half. Like-for-like sales for Shaver Shop were up 9.3%, driven by both online sales being up 61% on last year as well as like-for-like sales growth in our bricks-and-mortar stores. Gross profit margins were down slightly at 41.7% due to product mix and strong growth in some of our lower-margin categories. With operating costs well controlled, we delivered EBITDA of $12.9 million, up 16.8% or $1.9 million on the comparable result from last year. Operating cash flows were also strong at $23.7 million, leading to net cash of $8.4 million at 31st December 2019. So having regards to these strong financial results, Shaver Shop's Board announced an interim dividend of $0.021 per share, 80% franked. This is up 5.0% on the interim dividend from last year. So let's go through the top line results in a bit more detail on Slide 6. Total sales were up 12.3% to a record $107.5 million in the first half. In contrast to prior years, where Shaver Shop's top line growth was driven more by new store openings or franchise buybacks, like-for-like sales growth of 9.3% was the biggest contributor to Shaver Shop's growth in the first half. Around 18 months ago, we highlighted our plans to become a leading omni retailer in our categories, and that this would require investment in both skills and capability. Clearly, this investment is now delivering strong returns with online sales up 61% and now representing 17.6% of our total revenue. And as I've said, pleasingly, our bricks-and-mortar stores have also delivered positive like-for-like sales growth. The New Zealand business also continues to strengthen with above company average like-for-like sales growth being complemented by the opening of the new market store in Central Auckland. This store has quickly grown to be one of our best-performing stores in the region after only 4 months. The launch of Shaver Shop on the TradeMe marketplace as well as further improvements to our New Zealand website have supercharged online sales. And finally, we continue to execute our franchise buyback strategy, securing 2 franchises in early FY '20. Both Hornsby and Doncaster will refurbish immediately following acquisition to reflect our latest look and feel, with the Hornsby site being relocated within the center to when the Wakefield will drive higher foot traffic and returns over time. So overall, we are very pleased with the way our omnichannel initiatives are playing out. There are still significant improvements we think we can make, but we believe our first half sales results show we're well and truly on the way to becoming the leading omni retailer in our space. I now hand you over to Larry to discuss our financial results in detail.

Thanks very much, Cameron. We're now on Slide 8. As many of you know, a new accounting standard for leases, AASB 16, became effective for Shaver Shop on the first of July 2019. This means that Shaver Shop's operating lease portfolio, and this primarily relates to our store network, are now effectively classified as finance leases. Like most other companies, Shaver Shop has adopted the modified retrospective transition approach, which means we have not restated our prior year financial results. So to assist with comparing results between reporting periods, we've developed and shared pro forma results, which show Shaver Shop's financial performance and position on a consistent basis with last year. That is to say, using the old lease accounting standard. The focus for the remainder of the presentation will, therefore, be on these pro forma results in comparison to the normalized results from last year. Reconciliations between reported and pro forma results are contained in the appendix to this presentation as well as in the director's report that accompanies our interim financial report. Moving on to Slide 9. As touched on earlier by Cameron, total sales were up 12.3% to $107.5 million due to a combination of like-for-like sales being up 9.3%, the full period impact of the 6 new stores opened in the first half of 2019, together with the 2 months' contribution from our Newmarket, New Zealand store that was opened in November 2019 and finally, the completion of 2 franchise buybacks earlier in the first half. From a category perspective, we saw strong growth in complementary categories, like hair styling, power oral care as well as long-term hair removal solutions supported by continued growth in our overall hair removal categories. Some of the category and products that grew strongly come with lower than company average margins, leading to gross profit margins overall being down 100 basis points on last year. Pleasingly, we were able to deliver operating leverage in the first half with our cost of doing business as a percentage of sales dropping around 170 basis points to 30.5%. This led to Shaver Shop generating $12.9 million in EBITDA, up $1.9 million or 16.8% on the prior corresponding period. With the full store refits completed in the last 12 months, together with the launch of our new CRM and ERP platforms, this depreciation and amortization increased $0.3 million to $1.4 million. Pleasingly, the growth rate at an EBITDA level was largely maintained on the bottom line with net profit after tax being up 16.3% to $7.9 million which gives us basic earnings per share of $0.065 per share, and cash EPS of $0.07. Cash EPS is a noninterest measure that reflects a tax benefit Shaver Shop receives from the franchise buybacks and the termination of the franchise license, in particular, in which it has completed over the last 5 years. Moving to the next slide. The left-hand side of Slide 10 shows EBITDA growth that we've achieved over the last 5 years. This clearly shows the underlying business has grown each year, albeit 2016 and 2017's results were supported by very strong contributions from a small number of product lines. Our business now has very broad contribution from many products with no single product generating more than 2% of sales in the half. Moving on to the key drivers of first half EBITDA on the right-hand side of the slide. The 9.3% like-for-like sales increase drove EBITDA up $1.8 million in these stores. This was complemented by positive contributions from both the FY '19 and FY '20 buybacks and 7 greenfields that were completed over the last 18 months. As a group, the greenfields and buybacks delivered $0.8 million in incremental EBITDA. Total marketing expenditure dropped $0.4 million in the half as Shaver Shop transitioned some television advertising and catalog spend into the digital sphere. Importantly, our digital marketing expenses are spread more evenly across the year. And with the additional investments we are making to execute our omni retail initiatives, we expect total marketing expenditure to increase in the second half, which, in turn, should lead to an overall increase in marketing expenditure in FY '20 compared to FY '19. Lastly, as foreshadowed at our results announcement in August 2019, the investments in people and capability in our support office, primarily to drive marketing and e-commerce programs, has led to a $1.2 million increase in corporate overhead cost in the first half. When combined, these core drivers of our EBITDA -- led to EBITDA increasing 16.8% to $12.9 million. Moving on to Slide 11. Shaver Shop was able to achieve significant operating leverage in the first half, resulting from a combination of strong like-for-like sales growth, together with ongoing cost control measures. Total operating expenses as a percentage of sales declined 170 basis points from 32.2% in the prior corresponding period to 30.5% this year. This is a pleasing result as the dollar increases that we foreshadowed, a national support office costs and marketing have been offset by strong growth rates in the top line as well as increased efficiency within the store network. In terms of marketing and advertising expense leverage, some of this is due to a change in the phasing of marketing expenditure as we increase the proportion of spend in the digital space. Some of these expenditures are subscription-based rather than tied to promotional events, like Christmas, so the expense will come in more evenly across the year. So while some of this operating leverage from marketing may unwind in the second half of the financial year, we're hopeful that the increase in marketing activity in the second half will, ultimately, reduce our reliance on Christmas in delivering our full year earnings results. In summary, we're very pleased with the operating leverage achieved, which has in turn driven an increase in EBITDA margins by 50 basis points to 12.0% in the first half. Now on to our financial position on Slide 11. Shaver Shop continues to maintain a strong balance sheet with relatively conservative gearing. Net cash was $8.4 million at the end of the first half. This compares to $6.4 million net debt at 30 June 2019 and $4.2 million net cash at the 31st of December 2018. The transition from net debt at 30 June to net cash at the end of December is typical for our business, given the strongest sales are achieved in November and December with the bulk of our payments for Christmas stock purchases being made in January and February the following year. Despite 3 additional stores in the network at the end of the reporting period, our total stock value was flat, leading to average stock levels per store declining slightly to around $285,000. Accounts payable increased $4.9 million, reflecting a change in the phasing in terms for stock purchases coming into Christmas. Overall, the balance sheet remains sound with all bank covenants well within the required thresholds. Slide 12 contains our cash flow. A reconciliation between the reported and pro forma cash flow is in the appendix to the presentation. On a comparable basis, Shaver Shop's operating cash flow increased 33% or $5.9 million to $23.7 million. As referred to in the previous slide, almost $5 million of this improvement is expected to unwind in the second half of the financial year due to the change in phasing for supplier payments. The benefit of the franchise buyback private ruling is in part reflected in the tax payments line with our actual cash tax payments being $1.4 million in the first half in comparison to the income tax expense shown on the profit/loss of $3.4 million. CapEx was $2.9 million, an increase of approximately $1.5 million on last year, which was primarily due to the 7 full store refits or relocations completed over the period as well as the investments made in our core marketing, financial and operations technology platforms. While these core CRM and ERP platforms are now in place and operational, there are a number of optimization projects underway to ensure we maximize the operational efficiency opportunities these new systems present. Overall, net cash flow was $15.5 million, up $4.4 million on the same period last year. Now moving on to Slide 14. In light of the strong financial position and improved earnings and cash flow, Shaver Shop's Board today declared an interim dividend of $.021 per share franked to 80%. This is up 5% on last year's $0.02 dividend, 80% franked, and represents the fourth consecutive year that the interim dividend has been increased. Shaver Shop's dividend policy remains to pay out approximately 60% to 80% of cash net profit after tax on an annualized basis. I'll now hand you back to Cameron, who will take you through Shaver Shop's second half priorities.

Thanks, Larry. Just moving on to Slide 16. There is a lot to say about our omni retail and always on the marketing plans. So the next slide is devoted specifically to addressing this topic. Importantly, with our plans around attracting new customers to our website, we've seen an almost threefold lift in our e-mail subscriber database over the last 18 months to approximately 340,000 customers. New Zealand remains a great opportunity for our business. Increasing brand awareness, opening new stores, continuing to improve staff training and our online experience of 4 areas, we think we can further drive this business in the coming months. We will continue to search for the latest product innovation in our categories and seek sales exclusivity where it makes sense. We have 3 full store refits either underway currently or planned for the end of the financial year. We are also reopening our Karrinyup store in WA in the next few weeks. Finally, the new technology platforms were implemented and working well. But as with all systems, there are some tweaks we want to make to maximize operational efficiency gains. We hope to roll out a number of these out over the next 4 to 6 months. In terms of our omni retail transformation, Slide 16 reflects the financial success in executing these plans over the last 4 years. In our August 2018 results presentation, we talked specifically about why Shaver Shop felt it was important to increase investment in our omni retail capabilities. It is now very pleasing to report that these investments improving significant growth in our online business and has also meant Shaver Shop is on track to deliver its 14th consecutive month of like-for-like sales growth. This is a strong result, having regards to the current retail environment. We have well and truly transitioned from a bricks-and-mortar retailer to an omnichannel one. There is a whole program of work we implemented to achieve this. Over the last 6 to 12 months, we reallocated marketing spend from catalogs and television advertising into the digital space. In doing so, we increased our exposure on social media, increased the frequency and relevance of online offers, further improved navigation and the look and feel of our website and modified our approach to search engine marketing and search engine optimization. All these factors and more have led to increased unique visitation to our website, higher sales conversion rates and increased average transaction values. As many of you know, we also distribute all online orders from the store with available stock that is nearest to the customer. This makes it easy for us to offer Click & Collect, a new service we rolled out fully in the last 6 months. This distribution model is efficient and more importantly, puts our stores and store teams at the very heart of our omni retail strategy, which, at the end of the day, is all about putting the customer first. The omni retail plans are all about making it easier, more informative and more enjoyable to shop at Shaver Shop compared to any other online or bricks-and-mortar retail in our categories. And while we feel we've made good strides in our intended direction, there is still so much more opportunity to grow. A few of these opportunities are highlighted on this slide. So while I'm proud of what we've achieved in the last 18 months, I'm even more enthusiastic about what lays ahead now that we have some of our foundational investments in place. Moving forward and looking at our trading update and outlook. I am pleased to report that the factors that led to our strong performance in the first half have continued so far in the second half with like-for-like sales up 7.6% for the 6.5 weeks through to 14th of February. Online sales continues to be the key growth driver. We continue to see our complementary product categories like hair styling growing strongly with our core hair removal categories also delivering positive like-for-like sales growth. Gross margins are relatively consistent with what was achieved in the first half, and we're continuing our store refit program with 3 stores to be refurbished in the second half. I'm also pleased to report that we're reopening our Karrinyup store, as I mentioned earlier in the presentation. This will bring our store network to 123 at the end of March. So it's been a solid start to the second half. In terms of our full year outlook, we expect our omni retail plans to continue being a key growth driver. We also expect our in-store service metrics to continue to remain strong. These factors have contributed to Shaver Shop being on track to deliver our 14th consecutive month on positive like-for-like sales growth. That said, we do expect like-for-like sales growth to moderate in the second half as we begin cycling the significant same-store growth rates recorded in the second half of last year. The success achieved to date in our omnichannel marketing plans means we expect to increase digital and overall marketing expenditure in the second half of the financial year. These investments may not deliver in near financial returns, but we expect this will set the stage for growth in FY '21 and beyond. In regards to the coronavirus, it is unclear whether this will have any impact on our business, but we are monitoring the situation very closely with our suppliers. Shaver Shop expects comparable FY '20 EBITDA to be in the range of $14.25 million to $15.75 million assuming no material impact from the coronavirus. So in summary, on Slide 20, Shaver Shop is a specialty retailer with a leading and differentiated market position in a growing segment. We have delivered record financial results in the first half of FY '20 with a solid start to the second half. The investments we are making in executing our omni retail marketing plans are delivering exceptional returns with online sales up 61% in the first half to now represent 17.6% of total sales. We're going to continue investing in our omni retail strategy in the second half as we still see significant opportunities for growth and return from these investments. Our New Zealand business is continuing to grow quickly with significant further opportunity to improve both in-store and online sales. Our strong balance sheet and cash flow and confidence about the future has led to the Board increasing the interim dividend to $0.021 per share, 80% franked. And finally, Shaver Shop expects full year EBITDA to be in the range of $14.25 million to $15.75 million. Thank you all for listening. Larry and I are now happy to take any questions you may have.

[Operator Instructions] Your first question comes from Danny Younis of Shaw and Partners.

Three or four questions, if I can, please. The first one is around your full year guidance. That excludes the impact of coronavirus as you pointed out. A number of Australian retailers listed some issues with coronavirus. I'm interested in your current inventory stack and where the shortfalls are likely to be in the next 3 to 6 months across your product categories that are sourced from China.

Danny, at the moment, as we've mentioned, we're in discussions with suppliers on a daily basis. The short-term impact to this stage appears immaterial. In terms of our stock coverage by most product categories, you'd be aware, we generally see it on 12 to 13 weeks of cover as a minimum. Some of those categories are slightly higher than that, certainly, our top-selling lines. So look, at the end of the day, Danny, all we can do is continue to liaise with our suppliers closely, which we're doing. We're having top level discussions on a daily basis. But ultimately, at this stage, we don't see any material impact resulting from the coronavirus.

Okay. And on to New Zealand, that looks like an interesting story. Can you maybe parse that out a little bit further in terms of your overall strategy there? I mean how many stores do you need to get to scale? What's your inventory sourcing like? What does the competitive landscape look like, et cetera, et cetera?

Yes. I think, Danny, it's been fair to say that New Zealand has been a bit of a challenge for us in the past. I mean we have been there now for 6 years. But it's very pleasing. I think the last 12 months, we've seen a real change in the momentum across our New Zealand business. A lot of our supply is now solidified through local distribution channels, and I think that definitely helps. And obviously, the opening up of the Newmarket store, I think, has really helped with our branding as well. As we mentioned earlier, the Newmarket store is performing very well, and we continue to invest heavily in staff training. So in terms of scale in New Zealand, our short-term plan or our plan for New Zealand has always been in the vicinity of around 10 to 15 stores. So there are some greenfield opportunities that remain within New Zealand. But as you know, Danny, we've always been very, very disciplined on our commercials associated with any greenfield site opportunities. So if the terms don't stack up, we have no issues of also not opening stores in New Zealand as well and continuing our investment across the digital channel.

Okay. And on to online, that looks very strong for you. So well done on that front. I'm just interested in the differential between physical bricks-and-mortars and online. Can you maybe just talk about the differences in bricks-and-mortar and online in terms of average transaction value or basket sizes or number of items, et cetera? Is it feasibly different or significantly different from bricks-and-mortar or not?

Yes. The UPT is relatively similar. I think we have still significant opportunities to increase units per transaction or basket size online. The average transaction value is actually probably slightly higher online, but that primarily is through a product category mix. Some of our categories are more susceptible or have a higher success rate online, and those categories can often be a higher-priced items as well.

Okay. And maybe one around digital, your marketing spend half-on-half declined from about 5% of sales to about 4% of sales. You're earmarking more digital spend in the second half. So can you talk about what sort of spend level would you require in dollar terms or percentage terms to really generate a significant return on investment from your SEO or social media or a customer data analytics? I mean how high should that marketing spend go, particularly with regards to digital?

Well, Danny, I think we tried to call out in the second half that digital marketing has obviously worked very well for us in the first half. We did transition away from some of the television advertising we had traditionally done, which is why you're seeing some of that reduction. But we do expect an increase in overall dollar spend in the second half in marketing and advertising primarily related to digital. That marketing and advertising is going to be sufficient, the increase is going to be sufficient that we do expect to see a slight increase now year-on-year, for the full year in marketing and advertising. So slightly higher total dollar spend, but as a percentage of sales, it's still likely to come down because we've had such good growth on the top line so far during the year.

And will that be the new baseline into FY '21, '22?

Yes. I think what you're going to increasingly see is us trying to invest across the year in digital marketing so that we reduce the seasonality of the business and hopefully, get a greater amount of our EBITDA or EBIT going forward, generating in the second half.