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

Ladies and gentlemen, welcome to Shaver Shop's results presentation and investor conference call for the 2023 financial year. Please note that today's call is being recorded. [Operator Instructions]. Presenting today will be Cameron Fox, Shaver Shop's CEO and Managing Director; and Larry Hamson, Shaver Shop's CFO and Company Secretary. If you wish to follow along with the slides, Shaver Shop's presentation has been lodged with the ASX and is also available from Shaver Shop's Investor Center website. I will now hand you over to Mr. Cameron Fox. Please go ahead.

Good morning, ladies and gentlemen. Thanks for joining us today as we present our financial results for 2023. In terms of the agenda, I'll provide a high-level summary, financial and operating highlights from the last year as well as talk to some of the key drivers of the results. Then I'll hand you over to Larry who will go through the financial results in more detail. We'll then touch upon our priorities for the coming year and provide a quick update on our trading results for the first 6 to 7 weeks of 2024. So let's jump straight into highlights on Slide 4. Our first half, we set another new sales record for the business, generating $224.5 million, up 0.8% on last year's results with strong performances from our core men's trimming categories like men's shavers and our quick and trim business. Importantly, our sales results for 2023 were more than 34% above the pre-COVID results of 2019. The strength in our gross profit margins that we highlighted in our half yearly results continued throughout the second half, leading to record gross profit margins of 44.5%, which is up 60 basis points. Now this is clearly 1 of the standouts in our announcement today. We kept our costs well controlled throughout the year, managing to drive savings in certain expense categories to at least partially offset the impact of our stores being fully operational for all of 2023 financial year as well as partially mitigate the inflationary impacts to retail award wages. All of these factors led to net profit being up 0.8% to $16.8 million and earnings per share coming in at $0.131, a really pleasing result given the softer trading environment we experienced, particularly in the second half of the year. Operating cash flow increased 14% to $32.3 million, with stock levels also very well controlled. Finally, on this slide, our Board remains very focused on shareholder returns, declaring a final dividend of $0.055 fully franked, consistent with the final dividend from last year. This brings total 2023 dividend to $0.102 fully franked, an increase of 2.0% on last year's $0.100 per share payout. So really pleasing set of financial results to back up similar results in FY '21 and FY '22. So let's move on to some of the operational highlights on Slide 5. While Shaver Shop is a niche retailer, our products are relevant to the mass market across almost all age groups and demographics. As a result, we processed more than 2.5 million orders last year, with around 378,000 of those orders being generated online. This online metric is well down on pandemic-impacted results over the last 2 years with customers increasingly returning to our stores to shop. As I've said many times in the past, our stores are the heart and soul of Shaver Shop, driven by our passionate and knowledgeable team members that strive for customer service excellence each and every day. This is reflected in our Net Promoter Score, or NPS, once again, being at a world-class level of 88.6 out of a maximum score of 100. Now we opened 2 new stores last year, and we retrofitted 7 other stores. We also closed our Melbourne Spencer Street store shortly after year-end, given the foot traffic levels and shopping frequency just isn't the same as it used to be across Melbourne's CBD. Pleasingly, click & collect orders increased to 13.4% of total online sales and click & collect has a 3-pronged benefit to our business. Firstly, it brings customers back into our stores where we can create an ongoing and more personal connection. Secondly, it shortens the time frame for customers to receive their items and reduces call volumes through our customer service lines. And thirdly, it reduces postage and freight costs driving increased profit contribution. Now despite the obvious inflationary pressures, we were able to keep our cost of doing business relatively flat at 26.2% of sales through actively managing and adapting our cost base. We also maintained our focus on inventory terms with average stock per store coming at 180,000 or around $22 million in total inventory across the network. So overall, some really pleasing operational and financial metrics for the business. Let's now move to the next slide and review our top line sales performance across 2023 and discuss some of the trends and changes we saw over the course of the last 12 months. As I briefly mentioned earlier, shoppers have returned to stores with around 77% of all revenues being generated in our physical outlets. In-store revenues were up 18% to around $173.5 million. Importantly, while foot traffic across the year is up versus the last few years, it remained well below pre-COVID levels, but consumer propensity to spend remained elevated. This was reflected in sales conversion of being 43.9% for the year, up 170 basis points on last year and all new type -- all record for Shaver Shop. As we progress throughout the year, we observed shoppers being more value conscious and discerning when making the purchase decisions. In terms of the quarterly trends, we had a very strong start to the year with quarter 1 sales increasing 17.5% on FY '22. Now we are cycling these strong sales growth numbers now. Top line results started to soften early in Q2, but key promotional periods like Black Friday, Boxing Day remained resilient. Total sales declined 4.1% in quarter 2, which despite still driving strong profitability for our business was disappointing compared to our internal expectations. The sales softness in quarter 2 flows into the next 2 quarters with quarter 3 being down at 2.3% and quarter 4 being down 4.0%. Interestingly, our end of financial year sale in June was very well received by customers with Shaver Shop reporting sales growth for the month. This leads us to believe that our customers are well educated about our products and are willing to purchase when there is a highly compelling value being offered. So while sales were down 3 of the 4 quarters compared to last year, compared to pre-COVID or FY '19, total sales remained very elevated, up 34.1% across the year. So far, indicating there has been no material pull forward in sales through the pandemic. That leads me to discuss 1 of the major highlights from our results in more detail on Slide 7. Gross profit margins were a record 44.5% in FY '23, up 60 basis points on last year. As we continue to balance the desire to drive sales volumes and top line revenues with gross profit contribution back to the business. This clearly worked very well with gross profits increasing to almost $100 million last year. In relation to trade-wide models in our core men's and women's hair removal categories, we continue to be fiercely price competitive to retain and grow our market share. However, in adjacent categories we're retaining market share is not as high of a priority. We deliberately chose not to match in-market pricing when we felt it didn't make commercial sense for us to do so. From a category perspective, trimmers and men shavers performed very well last year. We had a hypothesis that Shaver's would rebound when work is returned to office environments. This ultimately proved correct with strong growth being realized. Trimmer sales also remained resilient. On the other end of the scale, and as expected, DIY massage products, which grew immensely over the pandemic were less in demand over 2023. We'll continue to adapt and monitor our pricing strategies, taking into account competitor activity and consumer sentiment with a goal of maximizing gross profit dollars to Shaver Shop. Pleasingly, there has been a step change in our gross profit margins over the last 3 years, increasing from around 42% pre-pandemic to around 44% to 45% today. While supply and category mix will always have an impact on gross margin percentages, there are also other controllable factors that have influenced our strong margin result, which takes me to Slide 8 and the contribution from exclusive products. As a leading specialty retailer of men's and women's personal care and grooming appliances across Australia and New Zealand, we pride ourselves on offering customers the broadest range at all price points across all categories. Equally important is offering customers a truly unique shopping experience. This comes from our store teams being trained to be product matter experts. It also comes from our buying team's ability to identify and source lines from global suppliers on an exclusive basis. Generally speaking, these products are the latest in innovation from these global suppliers that are sold at a higher price point and generate higher margins for Shaver Shop as well as the suppliers themselves. Now consistent with last year, almost 50% of our sales and 57.2% of our gross profit came from these exclusive product lines. These results are not only driven by sourcing the right product on an exclusive basis. We also spent considerable time educating our store teams about which products to prioritize at various price points through each category. It is an integrated approach. And over time, it has become a core component of our business model and value proposition to the customer. Looking forward, we have a range of initiatives that are designed to maintain or increase exclusive product contributions to sales and profits in the future. I'll now hand you over to Larry to discuss the financial results for 2023 in more detail.

Thanks, Cameron. We're now on Slide 10. Total sales were up 0.8% to $224.5 million, a new record for the business. It was entirely driven by in-store sales growing $26.5 million to $173.5 million, again, setting a new benchmark for Shaver Shop. Offsetting this was the decline of online sales of 32.6% or $24.7 million to 54 -- $51 million, I should say. Online sales represented around 23% of total sales in 2023 and have been consistently around that level for most of the year. Moving on to gross profit. I won't rehash what Cameron's taking you through already, but clearly, the gross margin expansion that was achieved is a highlight and prove that our decision to strategically manage pricing to optimize gross profit dollars was a good one. Operating expenses are what we call cost of doing business came in at $58.9 million, up 2.6% or $1.5 million on last year. I believe this is another very strong result for Shaver Shop having regard to our stores being opened for all of 2023 as well as being able to offset some of the inflationary pressures that have been impacting all retailers. I'll speak more on this later. Depreciation and amortization increased significantly as the number of store leases entering holdover increase during the year, and we continue to reduce the average lease tenure of the portfolio. You'll see there is a partial offset to this in interest expense where lease interest is lowered. We have also been focused on investing surplus funds to the extent practicable now that interest rates on deposits are returning an acceptable amount. All of these factors led to our net profit after tax to be $16.8 million, up $0.1 million or [ 0.8% ] on last year's result. With a slight increase in the weighted average number of shares outstanding during 2023, our EPS declined slightly to $0.131 and our cash EPS came in at $0.139. For those of you that are relatively new to Shaver Shop, we report cash EPS because we received a relatively significant tax deduction each year through to 2025, related to the value of the franchise right termination assigned to each of the buybacks that we've completed. It effectively results in cash taxes payable for each of the 5 years following the buyback and to be lower than the tax expense shown in our P&L. So if you'd like more detail on this, it can be found in the directors' report on the financial statements as well as an appendix to this presentation. Slide 11 provides a bit more detail on the relative contributions to sales from our online and bricks-and-mortar channels over the last 6 years. A few key takeaways from the top right-hand graph. Firstly, you can see that other than the lockdown impacted periods in 2021 and 2022, in-store sales represented by the gray bars are growing with the highest ever in-store revenue result for Shaver Shop being generated in FY '23. We think this is reflective of the nature of the categories we sell and customers' preference to have a personal face-to-face interaction to understand which product that suits their needs before they make a purchase decision. That's part of the reason why our in-store teams and their product knowledge is so important to our business model. The second key takeaway is that while online sales have attracted considerably, they are still almost double the contribution they were back in 2019. And importantly, you can see in the bottom right-hand graph, online sales as a percentage of total sales has normalized and been very consistent at around 20% to 25% of total sales across each quarter. So we think this is the new baseline, and we are intent on growing our web sales business again from here forward. The last point on this slide is around fulfillment. Pleasingly, we have seen a broader spread of fulfillment options being chosen by our customers with an increase in the proportion of click & collect orders coming in at 13.4% of all online fulfillments. We've also seen an increased allocation to Express shipping. We are continuing to seek to optimize the pricing structures for our delivery options to offer online customers value for money that is competitive in the market, while at the same time, minimizing the net postage expense to Shaver Shop. Now let's move on to Slide 12 and discuss the trends in our cost of doing business. Clearly, 2021 and 2022, and to a lesser extent fiscal year 2020 are not truly indicative of our underlying cost structure due to the impacts of COVID-19 across a number of our expense lines. We've highlighted these before, but to bring them back to mind, so you're considering them when we speak to our FY '23 results. During the government-mandated lockdowns, we are forced to stand down store team members, thereby reducing our employment costs. We also secured rent abatements from landlords for the periods when our stores were closed. And lastly, postage is a variable cost driven primarily by online orders and is a key reason why operational expenses rose to 5.0% of sales in FY '22. FY '23 is considered a more normal year and recognizing that we are going to have cost pressures coming through our P&L, we actioned various initiatives designed to offset them, including closely managing our rosters to ensure appropriately matched foot traffic within our stores. We also took a more strategic approach to our digital marketing spend, which drove increased return on investments at a lower overall expenditure. This led to marketing spend as a percentage of sales dropping 60 basis points to 3.2%. These are just 2 of the examples of these initiatives, but at the end of the day, the overall increase in cost of doing business as a percentage of sales of 40 basis points to 26.2% is considered an exceptional outcome for the business. Given these cost pressures are still apparent looking forward into FY '24, we'll continue to seek to offset them as much as possible through actively managing and adapting our business processes and approach. Brings me to Slide 13, our net profit and EPS results. We achieved our second-highest NPAT result on record coming in at $16.8 million, an increase of 0.8% on last year's results. This means that our NPAT margin was also consistent with last year at 7.5%. Compared to pre-COVID being FY '19, NPAT has increased 128% compared to the normalized NPAT result achieved that year of $7.4 million. The results are similar when we look at EPS. Basic EPS was $0.131 per share, down marginally on last year due, as I mentioned before, to an increase in the weighted average number of shares outstanding. Similarly, cash EPS was down 0.3%, but these are still very strong results, all things considered. Our balance sheet is strong and continues to get stronger, as shown on Slide 14. Net cash ended the year at $13.5 million, up $4.1 million. We have no debt and an undrawn loan facility amounting to $29.5 million. Cash balance was slightly elevated versus our internal expectations, given the end of financial year sales was stronger than expected, which Cameron mentioned. This, in turn, led to lower stock levels coming in at $22 million or thereabouts and higher cash. Our current net cash position has been achieved through hard work and changes to our business practices. Unlike some other retailers, Shaver Shop did not do a capital raise at the start of the pandemic. we instead immediately changed our procurement practices to generate as much cash flow as possible. So one of the really pleasing outcomes over the last 4 years has been our ability to keep stock levels much lower than what they were pre-COVID. This has allowed us to release at least $6 million to $7 million in working capital back into the business and significantly improve our stock turns and liquidity. Our stock position continues to be very clean, something we also plan to maintain going forward. Our right-of-use asset and lease liability balances continue to reduce as we've negotiated shorter lease terms for the last few years now. We also have around 1/5 of our leases in holdover as we renegotiate terms with landlords. This is also the reason why you'll see our lease depreciation increasing and our lease interest expense decreasing through the P&L. To be clear, our landlord relationships continue to be very positive, and we expect all of these leases to be renewed on acceptable terms in the coming year. But where it doesn't make commercial sense to keep stores operating, we'll make the decision to close as evidenced by the recent closure of our Melbourne Spencer Street store in very early July. And also to be clear, Melbourne Spencer Street was a profitable store for us. We just chose to optimize the profitability across all the stores in Melbourne by closing the Spencer Street outlet. Finally, for more context, we are giving -- we are generally renewing leases for 2 to 3-year terms. It means that we now have 30 to 40 leases renewing annually. So having 20 or so in holdover is not going to be an unusual situation for us for the foreseeable future. Moving on to our cash flow statement on Slide 15. Operating cash flow was up $4 million or 14.1% to $32.3 million in part driven by the lower than optimal closing stock position I referenced earlier. This will reverse in 2024 as we've already returned stock back to targeted levels. Even after adjusting for this, our cash conversion remains extremely strong as it has always been for our business. Net CapEx, after adjusting for the contributions from new and relocated stores was $1.4 million. This will increase in 2024 as we continue our store refit program and upgrade some components of our IT infrastructure. Finally, we returned $12.8 million to shareholders, an increase of $1 million on 2022, which takes me to the next slide. With today's announcement of a $0.055 fully franked final dividend for 2023. Total dividends for the year come to $0.102, up 2% on last year's $0.10 payout. It also means we are distributing close to 80% of our 2023 net profit after tax. We have now raised dividend payouts in each year since we listed on the stock exchange back in 2016, a fact our Board is very proud of and reflects their continued focus on maximizing returns for shareholders. At the moment, we are replenishing franking credits at the same rate that we are using them for dividends. So effectively, we're in balance. As the franchise buyback tax benefit unwinds over the next 2 years, our tax payments should increase, all else being equal, leading to more franking credits being available. In terms of return on capital employed, we remain above 30% coming in at 31.6% for FY '23, again, a very pleasing result. The Board has and will continue to consider all capital management alternatives for the business. However, at present and having regard to the relatively uncertain retail environment we're currently in, we've chosen to preserve our strong balance sheet that we fought so hard to achieve and also pay an attractive, fully franked dividend to our shareholders. Maintaining our balance sheet strength also allows us to consider value-accretive acquisitions and other investment opportunities should they present themselves. That concludes my section of the presentation. I'll now hand it back to Cameron.

Thank you, Larry. That brings us to our FY '24 priorities as reflected on Slide 18. Now what may seem a tad attributable to some. Our top priority remains running a very tight ship and maximizing our controllable operating metrics to the best of our ability. That means providing exceptional customer service every day, maximizing every sales opportunity that we have to drive up sales conversion and average basket sizes and ensuring that our sales focus remains on the products that maximize our penny profit at each price point through every category. We have systems that measure these operating metrics in almost real time, so that our management team can quickly react to any trends we are seeing. Our social media presence remains a huge priority. While it has improved considerably over the last 6 to 12 months, there is still so much more that we can do as a business to be relevant and reliable to the younger male and female demographic. It's important we establish this today, given they will become a Shaver Shop's loyal customers of the future. We will continue to drive the contribution from exclusive Shaver Shop products. Not only does this differentiate our business in the market, but as we've discussed throughout today, it gives us greater control over margins as well. Speaking of gross profit margins, we will continue our strategic approach to adjust prices to remain competitive, offer value for money to the customer as well as, of course, maximizing gross profit dollars. We are in the process of upgrading certain components of our tech stack so that they are fit for purpose for the next 5 to 10 years. Now these are highly complex projects that don't get undertaken regularly but are crucial to our future success. As we discussed, our flagship Chadstone store was relocated to a temporary location within the center as our section of the center has undergone a major upgrade. Our flagship location is scheduled to reopen in November with the latest store design. Our new store will be bigger, around 120 square meters, in fact, and reflect our latest brand standards and store design, as I just mentioned. If the new store design resonates with customers as well as we expect it will, this will then set the benchmark for what all future Shaver Shop stores will look in the future. Finally, while we're interested in looking at accretive acquisition opportunities, as Larry mentioned, we will retain our prudent approach that we've shown in the past and only proceed if we are very confident that it will benefit shareholders. That takes me to our trading update and our outlook. Moving to Slide 20. As mentioned at the start of the presentation, we are currently cycling the very strong sales results from quarter 1 last year, where sales were up 17.5% in the first quarter. Now with that context, year-to-date, our total sales have declined around 5.1% compared to the prior corresponding period. When you compare against the pre-COVID levels of FY '20, total sales remained very elevated, up 27.0% at a total sales level. Like-for-like sales year-to-date are down in the order of 4%. Center customer foot traffic is down slightly on last year, and shoppers propensity to spend also looks lower, likely due to cost of living pressures and interest rate increases. Whilst there are some visible headwinds, Shaver Shop remains exceptionally well positioned as a business. We are a specialist retailer that is a recognized leader in our core men's grooming market. Personal care and beauty remains a priority for many consumers, and we offer budget-conscious DIY alternatives to go into the barber or the beauty seller. We've adapted well in the past to the rapidly changing retail environment, and we will do so in the future by providing our customers with compelling, value-orientated offers relevant to their specific grooming needs and, of course, our price point. Looking forward to the rest of FY '24, and consistent with prior years, having regard to the importance of the Black Friday, the Christmas and Boxing Day sales period, our full financial year results, it is not appropriate to provide sales or profit guidance at this point in time. That concludes the formal part of the presentation today. We'd now like to open up for any questions.

[Operator Instructions] Your first question comes from Andrew Johnston with MST Access.

Congratulations, Cameron and Larry, for great results. I want to just zeroing in on a couple of issues. The advertising and marketing spend was down 3.2% of sales. Where do you expect to see that shift going forward? Obviously, you didn't have done -- you still produced a pretty good solid result even though that spend was down. So how do you think about that going forward?

I think on a total dollar basis, Andrew, I think we'll probably see it pretty flat going forward. The adjustments we made were particularly in our digital advertising spend, where over the course of the pandemic we really invested in that channel, particularly through some of the affiliated marketing Google AdWords and some of the other advertising channels that we use digitally. So overall, I think it may increase slightly from a total dollar value, but not significantly versus where we ended up for FY '23. We see that more as a permanent change.

And you mentioned that 1 of your priorities call it [ 24 ] is to increase the sales of your exclusive products. Are you planning on sort of expanding into other product ranges to get exclusive products and expanding the relationships with suppliers, perhaps move into women's products? Or is that something -- maybe it's not something you want to talk about, but I'm just interested to how you're going to expand that? Because I think if I'm right, that's about the same as last year. the percentage of gross profit from exclusive products.

Yes, correct. Yes. I mean the short answer, Andrew, is, it's really just continuing on with the strategy. I think we've included successfully for many years. We know that we have significant market share and scale across men's driven in particular and certain I still feel that there's some low-hanging fruit opportunities with respect to men's grooming as a priority in terms of where we can leverage more exclusives within those various categories, including, for example, men's body grooming.

Okay. And finally, just around the leases. So you're looking to reduce the tenure of the lease. And I think if I heard you correctly, from this point, your average lease tenure is going to remain unchanged. But just interested in the strategy all that the reasons for you're doing that. And then for the leases that you've renewed in the past 12 months, what was the result i.e. reduction in total expense? And I suppose that's going to be a combination of rouse assets and the finance costs associated with lease liabilities. .

Yes. So there's a couple of questions there. So the first one, in terms of average lease tenure, Really, just before the start of the pandemic, we started to look at our portfolio and when the pandemic hit we deliberately chose to renegotiate leases on a 2- or 3-year term was basically the maximum because we really weren't sure what tenancy mix and what was going to happen in a lot of the centers. And so that was a deliberate approach. So the average lease tenure is probably in the order of 3 to 4 years now, probably in the upper end of that range. It may still come down a little bit from where it is currently, but it probably won't come down that much more because there's certainly some centers, the A grade centers where we know we have good relationships with the landlords. We're in a good position, and we will renew those potentially on a 5- or 6-year lease. But for some of the other ones, middle of the portfolio, we may choose to still go with 2- to 3-year terms for the time being until the retail environment normalizes a bit. In terms of the lease expense coming through, so I think there's sort of 2 parts to your question. The first 1 is, I think, are we actually getting reductions on some of the lease renewals that we're doing? And the answer is yes. On average, we are getting reduction versus the last amount that we are paying on the previous lease. I won't go into the details of percentages reduced, but on average, we're getting reduction. The second part is in lease expense, which you referred to at the end of your question. And there are a couple of impacts. So lease expense overall increased, like if you look at our occupancy expenses line on the P&L, that should stay relatively flat year-on-year. But because we still had around $300,000 in rent abatements related to COVID-19 coming through in 2023 that was lower than it increased year-on-year, but it's still probably lower than a normalized result because we had those $300,000 in rent abatements that's highlighted in 1 of the slides. And then going forward, depending on the length of the lease term that you end up negotiating with the landlord that will impact the value of right-of-use assets and lease liabilities is set up on the balance sheet. That, in turn, impacts the level of depreciation and interest expense. So if you have a longer lease term, it's more interest expense at the start of the term and it reduces over time. So I hope that helped answer your question around the leases, lease interests and provide a bit more context around why you're seeing the movements coming through on some of those lines on the P&L.

[Operator Instructions] Seeing no further questions, I will now turn the call back over to Cameron Fox.

Thank you, Brenda. Just to close today, just to provide a broad summary of how the business is performing and the key fundamentals underpinning the strength of the Shaver Shop business. We are a segment leader, both online and offline. We are in a large and growing market driven by changing consumer preferences and, of course, new product innovation. Product range is applicable to almost all consumer demographics. COVID-19 has accelerated DIY personal care adoption and introduced new customers to Shaver Shop. Shaver Shop is a differentiated and resilient specialty retail business model. We drive on service excellence, unparalleled product knowledge, product exclusivity, exclusivity, we are a competitive a value-based pricing model as well. We have significant potential to further increase market share, very strong brand awareness in Australia, albeit in New Zealand, it is quite low and grow, proven and highly profitable omni retail model. We have a clean balance sheet, no debt, strong cash conversion. We have an experienced management and Board of Directors, and we have a very strong focus on investing for growth and improving total shareholder returns. And of course, we've experienced since listing very strong dividend payout and the intent to increase the dividend payout year-on-year. Thank you for everyone's support today, and that concludes today's presentation.

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