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

Good morning, ladies and gentlemen. It's a pleasure to be here today and thanks for joining us. In terms of the agenda, I'll share some of the highlights from the last 4 months before handing over to Larry, who will take you through the financials. And there, I'll speak to our 2023 priorities before finishing off with our trading update and our outlook. So let's get straight into the financial highlights on Slide 4. Sales increased 4.2% to $222.7 million, is a really exceptional result considering almost half of our store network was closed for 3 months during the government mandated lockdowns across New South Wales, Victoria, ACT, in quarter 1 and quarter 2 of last year. The uptick in sales was driven by like-for-like sales growth of 3.5%, including online sales growth of 23.7%. Online sales represented 34% of total sales for the year or approximately $76 million, our highest percentage and nominal sales results for this channel in the company's history. In the second half of the year, we saw in-store sales driving overall sales growth as customers increasingly return to their traditional shopping habits something we and our store teams are really excited by. In-stores where our business really shines and we differentiate ourselves. Moving below the top line, gross profit margins were robust at 43.9%, only 40 basis points lower than our record achieving gross profit margin last year. This exceptional results, together with ongoing cost control, this is delivering an NPAT result of $16.7 million, which is at the top end of our guidance range of $16.25 million to $16.75 million that we announced in June this year. So whilst this is down 4.5% on last year's record net profit result, we see it as an exceptional outcome, given we lost 14% of available good store trading days due to government-mandated lockdowns across the year. With the strong profit result, basic earnings per share was $0.133, and cash EPS was $0.142 both well up on pre-COVID levels. Now from a balance sheet perspective, we remain in a very strong position with net cash of $9.4 million at the end of the financial year after injecting additional $4 million into stock and returning $11.8 million to shareholders by the way of fully franked dividends. Our strong cash flow, trading performance and financial position has looked forward to declare a $0.055 per share fully franked dividend. This brings our total dividend to $0.10 per year, up 22% and at the current share price represents a pretty attractive dividend yield to shareholders. Our strong net profit and ongoing focus on capital management has also led us to deliver a return on capital employed of 32.9% for the year. Another achievement we are very proud. And moving on to our operational highlights on Slide 5. Our business strategy has always and will continue to be [ spending ] around delighting our customers. Our most important measure of success in our customer satisfaction score because this is a leading indicator for almost everything else. Now pleasingly, our NPS score, the fairly universal measure of customer satisfaction remains at world-class levels of around 88 to 89 out of 100. This is despite some pretty challenging and stressful circumstances for the store teams over the last 24 months. One of our key competitive advantages is the product knowledge of our store teams. Now in comparison to some other retailers that may see personal care and grooming as a complementary range to their core offering. We live and breath these categories. Our training of our store team is actually critical to delivering the service outcomes great and as customers expect. So really deciding to see the spirit of our teams and their passion for the business showing fruit over the face-to-face trainings that have recently returned after 24 months [indiscernible]. Online training models intend are just not the same as training our teams face to face. Moving on to our omnichannel highlights. When I look back at the last 3 years, 1 of the biggest factors that enabled Shaver Shop to go from strength to strength has been the success of our multichannel approach. We fulfilled more than 630,000 online orders from our stores and warehouse last year. That's more than 17,000 (sic) [ 1,700 ] packages per day on average across the network and almost 97% of these online orders were fulfilled and ready for courier collection within 24 hours of the order being placed by the customer. So whether our stores were open, closed or just fulfilling online orders, we were aiming to continue to meet consumer demand and adapt to our customers' shopping requirements. Now even though we're seeing an increase in foot traffic and in-store sales in the last 6-month period, foot traffic at store level even now remains well below COVID levels. That's in our frontline store teams are doing an incredible job in servicing and converting customers when they do come in to our shops. In the categories we sell, the desire for customers to touch and feel the product and talk to product experts, [indiscernible] is more than 3/4 of our sales are now being generated for our stores again. That's not to say we won't continue to invest in our online channel and build these capabilities. The customers' preferences are an important factor to consider in looking for various options, investment options we have in front of us at any point in time. The passion of our store team is also evident by a record engagement score of 91.2% in FY '22 despite the disruption and the caused by the pandemic. As you can probably tell from what I've said so far, I'm extremely proud of our store teams and the way they represented themselves and Shaver Shop brand through the pandemic. I wouldn't be speaking to these incredible results with our team's passion, focus and dedication to the business as well as the values we all share. So I'd like to thank them publicly on behalf of the Board and our shareholders for being the fundamental driver of the business' performance as well as our strong brand recognition. Okay. Now that we've been through the highlights, let's provide a little bit more context about how the results were achieved by looking at the top line results on a quarterly basis. Quarter 1 was especially challenging. In addition to cycling the exceptional results from quarter 1, 2020, when sales of hair clippers skyrocketed [indiscernible] with long-term lockdowns across New South Wales, Victoria and the ACT with also snap lockdowns also occurring in other states. Quarter 2 started really well at New South Wales reopened in mid-October and Victoria reopened later in the month. The trading strength continued wide through the Black Friday that slowed abruptly in mid-December with the Omicron outbreak. From the excitement of Black Friday in the promise of having a really strong Christmas what ends up being slightly supporting in the first half. Quarter 2 was quite a frustrating quarter even though sales did go strongly, up 8% on the prior period. Quarter 3 started softly, as Omicron fears continue to impact foot traffic in stores. We started to gain momentum slowly in February and March, leading to sales growth of 4.0% for the quarter. This momentum led us to a terrific quarter 4, which felt much more like normal as in-store sales grew strong total sales growth of 8.3% despite decline in the online sales. Pleasingly, as I'll get to later, that strength has continued into the first 7 weeks of the new financial year, albeit we are currently comping the store closure period for last year. Beginning a good guide or trend is quite difficult at this point in time. I give additional context of the quality of the quarterly trading results for FY '22. Let's compare back to our pre-COVID performance in FY '19. Total sales for the year were up 33.0% with the growth remaining very consistent across each quarter. This is reflected in the table in the bottom right of the slide in the last column. You can see how consistently strong out performance was despite the volatility of the market and operating challenges we faced over the 12-month period. The change in the way shoppers changed to shop with us over the last 12 months through FY '22 is fairly evident on Slide 7. From the lockdowns in the first quarter, where the majority of our sales were generated online. The last quarter, where online sales reverted to around 22% of sales, you really can see the benefits of our multichannel retail model on this slide. Now to be clear, online sales don't just come from our website. We also partnered with the following online marketplaces: eBay, TradeMe, MyDeal as well as with Amazon. We've specifically chosen to work with these partners and provide them with a specially curated range of products. We see these relationships as providing an important way wash to build upon our brand awareness with sales that you not overtly cannibalize our fully owned and operated sales channels. The key takeaway from this slide is something I've said before, as a true multichannel retailer and market leader in our categories, we are genuinely happy for customers to shop online, in stores or both. Our multichannel model is being designed to cater for this while still providing an excellent customer experience and delivering strong returns to the business. Slide 8 shows the growth of our online business over the past 5 years. In 2022, online sales increased to $75.7 million, up 23.7% and represented another incredible result for the business. You can see in the middle graph on this slide that online sales as a percentage of total sales has also increased materially over the last 5 years, sitting at 34.0% FY '22. now that's up from 10.2% in 2018. And finally, in the far right of the slide, the options for delivery have expanded with customers that are also choosing priority delivery, something we only rolled out late in the third quarter with DoorDash in addition to our standard Express Same Day and, of course, Click & Collect fulfillment options. We are continually looking at and experimenting with ways of optimizing delivery charges to provide strong value for money for our customers while also balancing delivery charges as these now represent a significant operating cost for the business. Slide 9 really does speak about the strong performance of the business and our omnichannel model. Our NPS scores, as I mentioned before, remain a world-class level in FY '22, averaging 88.4 out of 100 backed up from the 79.4 result we achieved in 2018. With foot traffic longer than pre-COVID levels, our store teams did an outstanding job of selling to the customers that did enter our shops, with 42% of those customers that entered our shops chosen to make a purchase. And lastly, lower in-store sales was down $5.4 million last year. This is entirely due to the loss of 6,200 in-store trading days, around 14% of available in-store trading days throughout the year due to government-imposed lockdowns. Within that context, it's actually a very strong result. So let's talk a bit about our products and our categories. In addition to the service we provide, our product range also significantly differentiates Shaver Shop from its competitors. We have a broader and deeper range of personal care and grooming appliances than any other retail online or offline in the Australian marketplace. Now why is that rates are differentiated. We're pretty simply because we work with our suppliers to secure exclusive access to the latest product innovations that they bring to the market. Our exclusive product range is something we've worked to build for many years with our supply partners and now represents more than 50% of our total sales and almost 60% of our total gross profit. So the obvious [indiscernible] these global supplies in trust Shaver Shop with their key global product launches. Again, very simply, it's because we've proven we are the best in explaining the prodducts and features of these new product innovations to customers. And why, for example, a $499 men shaver that effectively looks like same as $299 shaver will better meet the consumer needs. That means per capita, Shaver Shop sells more of the higher price, higher margin products to suppliers than our competitors do. But importantly, we've proven that we can sell more than just exclusive product lines. We are the market leaders in many categories of products. We are one of the market leaders with GHD hair styling products, electric toothbrushes and DIY massage guns. Now on Slide 11. The contribution of exclusive products and our decision to moderate discounting of these lines is a key reason why our gross profit margins remain elevated in FY '22 at 43.9%. From a category perspective, haircutting our highest margin category continued to be the largest sales contributor at 34% of total sales. Long-term hair removal and massage also grew share last year. Seasonally, as we predicted around 12 months ago, men's shaver softened during the lockdown. But over the last 6 months, we've seen a strong rebound in this category as people return to work in settings not and choose to be clean shaven. That is combined with beard trimming sales remaining very strong, which is in a great position to be in to have our largest categories, which we have above company average margins, delivering significant sales growth at the same time. And we think there's more room to run in these categories looking forward into FY '23. So I hope that's given everyone a bit more context around the business performance over the last 12 months. I'll now hand over to Larry to run through the financial results in more detail.

Thanks, Cameron. As previously mentioned, total sales were up 4.2% year-on-year despite us losing 14% of available in-store trading days to government-mandated lockdowns. We delivered 3.5% like-for-like sales growth, which was supported by an uplift of 23.7% in online sales. Importantly, like-for-like sales growth is a difficult measure to get a real bearing on this year because last year, when our stores were closed, we reallocated a significant proportion of our online sales to the stores that remained open. And as a result, sales of those stores were higher last year. So getting a true like-for-like comparison year-over-year is quite typical. In addition to this, the full year contribution from the last 6 franchises we bought back in February 2021 also contributed to the overall top line growth. When open, these stores performed to expectations and have been a great addition to the corporate store network. Gross profit margins remained strong in 2022 coming in at 43.9%. As Cameron said, hair clippers and beard trimmers were strong performers in the haircutting category with a significant proportion of these sales coming from exclusive product lines like the new Wahl waterproof stainless steel beard trimmer. While our stainless steel range has been a very strong performer for many years, as many of you will know, the new waterproof version launched almost 12 months ago, now offers customers the ability to use that product in the shower as well as outside it. As Cameron mentioned, we've also taken a more disciplined approach to pricing our exclusive products when on promotion to maximize profitability. We'll continue to try to optimize and balance the price volume equation going forward by using the learnings we've taken over the last 24 months. Cost of doing business increased $2.3 million on a nominal basis or 4.1%, but remained relatively flat as a percentage of sales at 25.8%. I'll talk a bit more about this on the next slide. This led to net profit after tax being $16.7 million, the second highest result in our 36-year history and at the top end of our guidance range. This also led to earnings per share of $0.132 cash EPS which reflects the benefit of the tax deduction we receive on franchise buybacks of $0.142. So overall, a really pleasing set of results with the second half of the year, delivering the highest second half profit on record for the company. Our half yearly P&L results over the last 5 years has been included in the appendices to this presentation should you wish to look at. Moving on to Slide 14 and a more in-depth analysis of our cost of doing business. Employment costs represent Shaver Shop's largest operating expense at $32 million. In the graph on the right of the side, you can see that in 2022, these costs as a percentage of sales reduced 70 basis points to 14.3%. This is due to these costs on a nominal basis, staying relatively flat at around $32 million with the prior year despite Shaver Shop having 6 more stores in the network at the end of the year. So why is this? It's entirely due to the store lockdowns in the first half of 2022 when we mitigated as far as possible the lost sales and gross profit from stores being in locked down. We did this by aggressively reducing roster costs where possible. Given that almost half the network was closed to customers for almost a course of the year, roster costs were reduced by over $2 million in this period, a decision we did not take lightly given the impact this has on our store teams and their families. In addition to lower operating costs, we were able to negotiate rent abatements again with many landlords amounting to about $600,000. These one-off benefits to our cost base being the lower employment costs and rent abatements are not expected in the future. But equally, we would also expect sales and gross profit to improve in FY '23, all else being equal, given the store should not be closed again in the future, touch wood. Operational expenses, which are primarily the variable costs required to operate a store are shown in the second to top bar in the graph. These costs increased 40 basis points to 5% and on the back of higher postage costs commensurate with the increase in online sales as well as due to higher merchant fees. Finally, we've been able to continue to drive operating leverage across our corporate overhead costs, as represented by other expenses reducing to 1.4% of sales or down 30 basis points. So overall cost of doing business in 2022 remained flat with 2021 at 25.8% of sales. a very pleasing result. Slide 15 puts into context the strength of our business performance over the last 5 years. Our net profit has more than doubled from $7.2 million in 2018 to $16.7 million this year. Of course, we've launched new stores, built out our digital channel and acquired the remaining franchises over this time, but this use of capital has driven incremental profit as well as incremental returns for shareholders. In terms of earnings per share, our basic EPS has increased from $0.058 in 2018 to $0.132 this financial year, and cash EPS has increased from $0.073 in 2018 and to $0.142 this year. Overall, a very positive trend in net profit and earnings per share. Moving on to Slide 16. From a balance sheet perspective, Shaver Shop remains very well placed with net cash at 30 June 2022 of $9.4 million. Net cash is up $2 million on the $7.4 million net cash balance at the end of last financial year. As we foreshadowed over the last couple of years, we increased our stock position to more normal levels by the end of 2022. The last 2 year-ends have been characterized by high risks of store closures due to the pandemic and as a result, we have deliberately reduced our stock investment to protect working capital and our liquidity. Now that stores are back open and expected to remain open and customers are increasingly returning to stores we chose to return stock to more traditional levels with average stock per store being $183,000 at 30 June 2022. Importantly, though, this is still well below pre-COVID levels. I think 2019 was up above $200,000 per store. There weren't any other material changes in asset or liability balances with small movements more driven by the addition of stores or the completion of full store refits and relocations. We ended the year with net assets of $78.6 million, an important metric when analyzing our return on capital, and I'll talk a little bit more about that on the next few slides. Moving on to our cash flow statement on Slide 17. Shaver Shop has always generated strong operating cash flow and 2022 was no exception, with $28.3 million generated during the year. As noted on the last slide, we invested $4 million in additional stock, which was the primary driver in working capital increasing $3.4 million and outflow of cash. Total CapEx after landlord contributions for new and relocated stores amounts to $1.5 million, and we returned $11.8 million to shareholders by way of fully franked dividends. The net result of all of this, as I mentioned on the last slide, is our cash balance increasing $2 million to $9.4 million. We've been asked by some shareholders about the Board's intentions on how best to utilize this cash balance. At present, the Board's intention, while it is still paying fully franked dividends is to continue to increase the dividend payout each year subject to there not being a more attractive use of that capital. There is also a preference to retain a higher degree of fiscal conservatism over the next 12 months given the softening macroeconomic environment we're currently in. Which takes us on to Slide 18 in our dividend payout trajectory. As Cameron said, today, the Board announced a $0.055 fully franked final dividend, which brings total dividend to 2022 to an even $0.10 per share fully franked, up 22% year-over-year. This represents the payment of approximately 70% of our -- of cash NPAT or the midpoint of our dividend policy, which is to pay out approximately 60% to 80% of cash NPAT. And when it comes to our use of capital, we generated an attractive return on capital employed of 32.9% whilst maintaining a prudent financial position. Return on capital employed is another metric we are very proud of and focused on maintaining. So that concludes the financial review. I'd like to take the opportunity to thank our shareholders and customers for your ongoing support, and I'll now hand you back to Cameron, who will talk through our 2023 priorities.

Thank you, Larry. We'll continue to work really hard through the pandemic to continue expanding our product lines and [ its relevance ]. We've added additional fragrance lines. We've added big brands for our massage range through Therabody company and have expanded into sound shampoos, conditioners and associated hair care products for men and women. We've secured some really exciting additional brands for our female customers, that we launched in the first half of this financial year, well and truly in line [indiscernible], and I look forward to speaking about these closer to the launch. I mentioned this earlier, but it's just so important to our business model. So I'm going to revisit it again. We have returned to face-to-face staff training with state-based section held in July this year, and we will continue to invest in these areas in the late after Christmas. This is so important to assuring our store teams are able to continue to provide excellent customer service in store and build long-term brand loyalty. As we indicated, over the last 2 presentations, now that international trends in New Zealand and keep back on, we're looking to add new stores there to build brand awareness and economies of scales in this region. We think this scope to add 6 to 7 new stores across New Zealand, provided, of course, the commercial stackup. What's perhaps not fully appreciated by the market and our customers is that many of the products we sell offer very cost-effective alternatives to go into the hair salon, barber, laser hair removal clinics and massage therapists. This is part of why we feel our business is quite resilient during economic slowdowns as well as the fact that people tend to prioritize the health and wellbeing versus more luxury type purchases. In any event, we want to ensure the cost-effective nature of our products is more prominently featured in our marketing collateral. We'll continue to improve our social media presence, something that I personally still wait probably about that and some of that has significant potential, particularly through leveraging our store teams. And finally, as we've said in the past, we'll continue to be agile in managing our business so that we deliver the strongest possible financial results for our shareholders without taking undue risk. This takes me to our trading update on Slide 22. Total sales growth over the first 7 weeks of 2023, FY'23 is up 19.2% and 6.3% over 2021. Remembering that 2 years ago, we had an exceptionally strong start to the year with sales of hair clippers in particular, flying off our shelves at an unprecedented way. In comparison to pre-pandemic levels, sales were up 35.6% across our first 7 weeks or so. In-store sales have been very strong, up 82.7%, on last year, 18.3% on 2 years ago and 20.5% versus the pre-pandemic results in FY '20. This has more than offset the decline in online sales versus the pandemic effective periods in FY '22 and FY '21. This decline was always expected to occur given our store network is now fully open again and customers have once again shifted back towards in-person shopping. The exceptional growth rate in still reflects the fact that customers generally like shopping in stores, particularly for the categories we sell. -- which is why we believe that our stores will always be the most important sales channel for our business. Frequently, gross profit margins have remained very healthy above our long-term average of 42% to 43%, with strong growth returning to men shavers having stagnated at the start of last year during lockdown when men who shave chose to grow more stubble. What's also really pleasing is that we're continuing to see really strong sales growth across [ E Trimmers ] despitely performing very well over the past 2 years. With these categories having higher than company average margins which together with disciplined pricing is leading to our margins remaining very healthy. [indiscernible] showed a very encouraging start of FY '23 financial year. In terms of outlook, having regard to the importance of Black Friday, Christmas and Boxing Day promotions, to the Shaver Shop's annual financial results as well as the continuing uncertainty caused by the global pandemic and changing macroeconomic environment, it is not appropriate to Shaver Shop to provide FY '23 sales or profit guidance at this point in time. Now that concludes the formal part of today's presentation. Larry and I will be more than happy to spend some time taking questions from the audience.

[Operator Instructions] Your first question comes from Andrew Johnston with MST. Sorry -- it's Danny Younis with Shaw and Partners.

Sorry, I only joined a couple of minutes ago, so my apologies if you've answered these questions. So the first 1 is you talked about gains in market share apart from being anecdotal, can you give us any quantification of the moving market share in the various categories?

No, not really. You probably know [indiscernible] a lot of our categories is the [indiscernible] terms of liking down equivalent at the grocery channel [indiscernible] had a total said and predominantly from our major suppliers. We're [indiscernible] that our rate of growth is healthy on competitors. So I'd say it [indiscernible]

Okay. And in terms of online, I think in the first half, you were running at 41% of your sales have come down to 34%, which is expected. Your number of customers doesn't seem to have changed online. I think in the first half, if I remember correctly, you were up 50% to about 650,000 that stayed at that number at year-end. How should we look at online moving forward? Will it head down into the 25%, 30% of sales range and the customer number not growing as much above that 650,000.

Yes, I think that's pretty fair, Danny. You can see on one of the slides that we've provided that -- on a quarter-by-quarter basis, online sales reduced about 22% to 23% in Q4. And so online sales represent a higher proportion of sales as we trend into Black Friday and Christmas because traditionally, that's a strong online time for us. So overall, I think a number of customers, hopefully, active online customers stays around that 650,000 level or so, maybe slightly lower over the course of the next year. But average -- as a percentage of total sales, I would expect it to revert somewhere between that 25% and 30% as we sort of predicted a couple of years ago once things go back to normal.

And maybe another 1 for you, Larry. You've taken out one of my favorite waterfall charts that you've previously put in around sales and EBITDA. But can you maybe -- clearly, there looks like to have been a step-up in your buybacks first half, they contributed about $2.5 million, $8.5 million by the year-end. Is that the full 100% revenue from your buybacks? And secondly, what were the permanent closures this first half, I think you had just under $1 million in permanent closures. what did it finish out in FY '22, please?

So in terms of the numbers for the buybacks first half, second half, those numbers are accurate. I mean the issue with the first half, obviously, with the stores were closed, like every other store in New South Wales for those 3 months. So the important takeaway is that those buybacks, when they've been open, have absolutely been performing to expectations. They're powerhouse stores and have been really accretive. Unfortunately, Danny, I don't have that number for you that you've asked about for the second part of your question. So unfortunately, I just don't have that number in front of me.

Okay. We'll take that 1 off-line. And just a final one, if I can. Gross margin is still very solid and 43.9%. Putting aside cost inflation in the next 12 months and hopefully, no further shutdowns or COVID restrictions. How should we look at that moving forward in line with historicals pre-FY '20 or can you hold it?

I think one of the pleasing elements that we're seeing is we'll focus on our exclusive product lines and better alignment of store level. So obviously, our exclusive product line is one of the higher gross profit margin. So I think there's some really encouraging signs at a gross profit margin stabilizing at higher than long-term historical averages in pre-COVID. But having said that, obviously, we just got to be conscious that we are coming into a big promotional events like Black Friday, where traditionally the [indiscernible] a little bit, obviously, throughout that period.

Your next question comes from Andrew Johnston with MST.

Congratulations on a good result. Good to see those gross margins holding up. I'll start with the issue that I probably got pretty wrong nearly 12 months ago around product inflation. Can you talk about what extent you actually -- you're seeing that in your numbers. It's not apparent that you're actually seeing much at all. But -- to what extent has -- are you not seeing your numbers because you've been able to effectively switch products to ones that are able to enable you to deliver the right price point.

I think there's a couple of points to that. I think we mentioned previously that it's very rare that all the suppliers pass on the cost price increase at the same time, and that's exactly what we're seeing. So we've sort of seen 1 or 2 suppliers pass on some cost rise prices. And there we're probably a little bit more at risk, I guess, on categories [indiscernible] within that core business [ within trimmers ], men's electric shaving and men's grooming, I think it's better say we've got such a strong market share and we have so much stable that. We a lot of cost price increases and switch brands because, again, you're talking about trimming brands like Panasonic, Philips and they're very, very rare that all 3 are going to take cost prices at the same time, and that's what we're seeing. The other thing I'd just call out is I think what we're seeing to some degree customers are still really prepare to pay byproduct representing customer value but doesn't necessarily have to be as a traditional, say, $99 price point. I think to some degree, customers are quite savvy. And the product represents great value with $109 or $119 they're still very, very much prepared to convert at that price point. So I think there's a couple of things going in the market whereby that's enabling us to be a little bit smarter in our promotional price points and protect those gross profit margins.

Okay. That's great. What is -- can you talk through the outlook for store openings over the next 12 months, 2 years?

Yes. Look, I think in terms of outlook for openings, it's probably consistent with what we've indicated in the last 12 to 18 months. I think Australia is at relative maturity. We might be looking at sort of net positive 1 to 2 stores per annum. And New Zealand is really the opportunity. We really do feel that we got another 6 stores there pretty quickly if we've got the right financials. And now the travels reopen, I think that's the short- to medium-term opportunity for us. So Australia is generally pretty stable net positive, maybe and New Zealand really the great region for us.