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 half year ended 31st December 2023. Please note that today's call is being recorded. There will be a presentation followed by a Q&A session. 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 over to Cameron Fox. Please go ahead.

Good morning, all, and thank you for joining us today. Larry and I are pleased to be presenting Shaver Shop's results for the first half. There will be a short Q&A session at the end of our presentation to respond to any questions. Moving on to Slide 2 and our agenda. I will quickly run through our first half highlights. Then Larry will go into our financial results in more detail, before handing back to me to outline our second half priorities and trading update. There are also some appendices at the end of the presentation, which provide some additional detail for those interested. Okay, with that, let's move on to our highlights on Slide 4. Our first half sales declined by 3.7% to $127.0 million, as we dealt with a more discerning and price-conscious consumer. Pleasingly, our quarterly trend improved between quarter 1 and quarter 2, and this has continued into quarter 3, and more on that later. We had expected the softer trading environment and implemented a multipronged approach to mitigate the risk we saw to sales volumes. One of our focus areas was maximizing gross profit margin in dollars, something we were successful at doing with a 10 basis point increase in gross profit percentage to 44.4%. We also focused on maximizing sales conversion within our stores. The average across the first half was 44.8%. And while this was down on our elevated results of the prior year, it was still above our internal targets. With costs well controlled, our net profit after tax was $12.5 million, down 8.6% on a comparative FY '23 results. Net cash came in at $31.9 million, supported by operating cash flow of $34.9 million. So in short, while demand was more subdued this half, we delivered a very healthy net profit outcome, and continue to maintain a sound financial position, evidenced by our ending net cash balance. This has led the Board to declare a $0.047 per share interim dividend, fully franked. Now this is flat on last year, but represents an increase in our payout ratio. Let's look at the first half sales drivers in a bit more detail on Slide 5. One of our key drivers of in-store sales is a level of foot passing our stores -- foot traffic passing our stores. What we've seen, based on the centers we have in our stores, is that foot traffic was down around 13% compared to the first half of 2023, and is down significantly more than this compared to pre-COVID levels. We were able to partially offset the decline in foot traffic versus the prior comparative period with an increase in shop front conversion. Now this metric is a proportion of passes by that actually choose to enter our stores. So it's a measure of Shaver Shop's relevance to the customer. Once in our store, the next factor we measure is the percentage of shoppers that actually make a purchase, a critical KPI known as sales conversion that is influenced by shoppers' propensity to spend as well as our sales capability. Pleasingly, sales conversion remains materially higher than pre-COVID levels, standing at 44.8% for the first half. This is roughly 120 basis points below the prior comparative period, but still a very solid measure and reinforces our belief that despite the pressure on household budgets, we are increasingly seen as a shopping destination for his and her personal grooming. Also important drivers of sales success is our ability to deliver relevant and compelling promotional campaigns. Coming into quarter 2, we work closely with our suppliers to secure attractive promotional pricing and adequate stock in key categories where we expected stronger relative consumer demand. This strategy worked well and ultimately also supported higher average transaction values. We also worked aggressively to drive strong online traffic to our websites by increasing online ad spend and continuing to improve our social media presence. Now this is still a work in progress, but we are pleased that online sales were flat compared to the first half of FY '23 at $31.1 million. This is lower than the online sales achieved during the lockdown period of FY '21 and FY '22, when many of our stores were closed, but is more than 53% higher than the online sales generated in the first half of FY '20 financial year, which is obviously prior to COVID. As a percentage of total sales, online has steadied at around 23% to 25%. Now this may creep up slightly over time, but as we've said before, given the nature of the categories we sell, we expect in-store shopping will remain the dominant sales channel for Shaver Shop. Now on to Slide 6 and [Audio Gap] performed in each quarter. After a stronger-than-expected performance in June, quarter 1 started softly with almost all of our key trading metrics trending in red. We ended quarter 1 with sales down 6.2% on the prior corresponding period with both outside and inside foot traffic down. Despite foot traffic being even softer in quarter 2, we entered the quarter with a very strong promotional plan and we are ready to execute. In-store sales conversion was almost flat in quarter 2 compared to the prior year. And the strategy to focus on a few key areas with high price points helped drive a significant increase in average transaction values. This, together with online sales returning to growth, mitigated most of the foot traffic decline in shopping centers, leading to our sales ending the quarter 1.9% down, and that is improvement on quarter 1 trend. Compared to pre-COVID, sales in quarter 1 were up 25% or so, with quarter 2 being up almost 14%. So our business is still in great shape with a brand and category proposition that clearly resonates strongly with consumers of all ages and demographics. In terms of gross profits, Slide 7 illustrates our gross margin trend in the first half compared to the last 4 comparative periods. As you can see in the top right graph, our gross profit margins have been very resilient since FY '21, being up at around the 44% level. Exclusive products continues to be a driver of the margin result, particularly across our core men's and women's hair removal categories. As I mentioned earlier, we also work collaboratively with suppliers to lock in one of our strongest promotional plans leading into Black Friday and Christmas that I can remember. We backed this up with staff training, adequate stock cover, as well as over and above marketing spend to maximize the sales and gross profit of key lines in the lead-up to both Christmas and through Boxing Day. We remain fiercely competitive on pricing in our core categories and chose to take a more opportunistic and pragmatic approach to promotional pricing across select trade-wide models. We believe this resulted in a solid balance in supporting sales and customer conversion opportunities in a fiscally responsible manner. So overall, I'm proud of the results that we delivered in a more challenging retail environment. Certainly, we are never comfortable posting a decline in sales. But in terms of the factors that we control, we executed well and mitigated as much of the environmental headwinds as possible. I'll now hand over to Larry, who will take you through our financial results in more detail.

Thanks, Cameron. Slide 9 shows a high-level view of our P&L. As mentioned earlier, sales were down around 3.7% to $127 million. We continue to see Christmas shopping patterns extending across November and December with Black Friday promotions starting around mid-November and increasingly pulling forward spending at the expense of the first 2 weeks of December. This is causing us to change the way that we roster our stores and promote our products in the lead up to Christmas. We see this as a structural change that's here to stay with Black Friday becoming bigger and bigger each year. With gross margin being up 10 basis points to 44.4%, we were able to offset a portion of the sales variance, leading to gross profit dollars coming in at $56.4 million, down 3.5%. One of the key highlights of the first half result was our ability to control operating costs, with our cost of doing business only increasing 0.3% or around $100,000. We'll dig into this in a bit more detail on the next slide. When you look at our depreciation and interest, there are some trends that are worth calling out. The first is on lease depreciation and lease interest. We've talked in previous presentations about our strategies to reduce the average lease term across our portfolio of stores. This was, first and foremost, to mitigate some of the risk of tenancy mix changes in many of the shopping centers around Australia, particularly around the time of the pandemic. As lease tenor has declined, this has led to an increasing proportion of our lease expense being recognized as depreciation compared to lease interest. We don't see this changing in the near term. We also had a higher number of leases on hold over this half compared to the same time last year. Both of these influencing factors explain the movements in depreciation and interest as well as the decline in the right-of-use asset and lease liability values on our balance sheet. With cash on deposit now also generating a meaningful yield, we invested our net cash across the half to generate incremental interest income. All these factors led to net profit after tax declining 8.6% to $12.5 million and generating basic EPS of $0.097 per share. Our cash EPS, which adjusts for the tax benefit we received on the franchise buybacks that we completed, was $0.101 per share, down 9%. Let's now move on to Slide 10, which further explains the movements across our cost of doing business. As mentioned on the last slide, cost of doing business were effectively flat year-over-year despite the inflationary cost pressures felt across the business. Employment costs increased $1.0 million or 5.8%, which reflects the 5.75% increase mandated under the General Retail Industry Award. The key area where we were able to offset this cost increase was in marketing and advertising, where we reduced our free-to-air TV spend and invested a portion of the savings back into digital advertising. This is a strategy we've been tweaking over several years, but was a much more aggressive approach this half. We appropriately reduce marketing spend as far as we can without impacting sales, as we'll likely see diminishing returns if we cut marketing expenditure too much further. We saw inflationary cost pressures also coming through our operational expenses and corporate overheads, but we're able to reduce expenditure in some of the lines in these areas to offset it. As a percentage of sales and excluding lease depreciation and lease interest, our cost of doing business increased to 23.9%, up 90 basis points on the prior comparative period. Overall, we think this is a credible result given the current inflationary environment. Moving on to our balance sheet on Slide 11. As mentioned on prior presentations, we are a seasonal business, and therefore, it's important to compare our balance sheet to the prior comparative period, not just to our June year-end. Our cash balance is at a seasonal high point at the end of December, reflecting the fact that we've just been through our peak sales period, but have not yet had to pay for much of the stock that we've already sold through. Net cash was $31.9 million at 31 December with no debt, and we had an undrawn $29.5 million debt facility. We didn't need to call upon that facility at any time in the first half. Inventory remains exceptionally clean. It was up $1.6 million on the comparative period last year, reflecting changes in supplier and stock mix as well as having one more store in the network at period end. We're continuing to invest in our store refresh program to bring our stores up to our latest brand and merchandising standards. We're also upgrading one of our core software platforms to improve operational efficiency as well as customer experience. We expect this to go live in the second half of this financial year. These investments are leading to slightly higher PP&E and software intangible balances. The change in supplier mix also led to a slight change in payment profiles with our trade payables decreasing $2.7 million compared to the same time last year. And lastly, on this slide, Shaver Shop's net asset balance was $90.4 million at the end of the half, up $3.9 million on the prior comparative period. Now on to cash flow on Slide 12. We started the period with $13.5 million net cash on the 1st of July. Operating cash flow was $34.9 million in the first half. This was down on last year due to 2 primary factors: the first being the need to increase stock levels back to a more optimal level in Q1 after much stronger sales than expected in June '23. We highlighted in our 2023 results presentation that we thought stock levels were already around $2 million lower than optimal at the 30th of June, and that we had already replenished that at the beginning of Q1. The second reason was due to the change in supplier mix and associated payment terms as referenced on the prior slide. This resulted in $2.7 million lower trade payables than the same time last year despite the $1.6 million increase in stock across the network. We used a strong operating cash flow to invest $1.8 million in upgrading 4 of our stores, including reopening our flagship Chadstone location just before Christmas. We also continue to invest in our IT network security hardware and core software platforms. Finally, we returned just shy of $7 million to shareholders by way of the $0.055 fully franked final dividend for 2023. Overall, the business remains highly cash generative, something we don't expect to change. We ended the period with almost $32 million in cash, but as mentioned on the last slide, this unwinds considerably in January and February, when we pay suppliers for Christmas stock purchases, and then pay the interim dividend that was announced today later in March. And speaking of dividends, Slide 13 shows the trend in Shaver Shop's dividends over the last 5 years. As Cameron mentioned, the Board today declared a $0.047 fully franked interim dividend, which matches last year's interim dividend. This is another increase in the payout ratio of net profit that's being returned to shareholders by way of dividend payments. The Board continues to consider various capital management alternatives. Having regard to the current retail environment, there's a desire to maintain a strong and liquid balance sheet as well as have the flexibility to pursue and invest in accretive growth opportunities should they arise. Finally, and importantly, Shaver Shop's annualized return on capital employed remains a very strong 26.1%. That concludes my presentation. I'll now hand you back to Cameron to go through our second half priorities and trading update.

Thank you, Larry. I'm now on Slide 15. We are very clear on the priorities that will drive Shaver Shop's success. First and foremost, we must continue offering our customers a unique and enjoyable shopping experience defined by exceptional customer service and compelling value for money offers across our entire range of products. Now to do this, we need to continue investing in our store teams to ensure they have the latest insights on the products we sell and how to explain these benefits to our customers in a simple and easy-to-understand manner. Many of the products we sell are quite technical in nature, so it's important we engage at an appropriate level for the customer. We are confident this leads to increased customer satisfaction as well as the higher likelihood of selling our products and creating brand loyalty for Shaver Shop. We will continue to balance top line demand with gross profit dollar growth, something that's worked very well for us over the last few years. We have several stores lined up for full store refits over the coming 12 months with Woden, ACT, and Chapel Street, Victoria, occurring this quarter. Our technology investment program also continues with the expected launch of a core software program in the second half. We've been investing in the system over the last 12 months and are now entering the key UAT phase. We will continue to look to expand the contribution from our exclusive only-at-Shaver Shop ranges. And finally, we will seek to identify between 1 and 3 new site opportunities over the next 12 months. Now that said, we'll only open these new stores if we are confident that would drive a commercially acceptable return on capital. Equally important at the moment is ensuring that our existing stores are located in the right areas, are the right size, and have the right commercials, so they maximize their potential. This is obviously an ongoing process with our landlords that will continue to influence our success. Now on to our trading update on Slide 17. Pleasingly, the improving sales trend that we saw across quarter 1 and quarter 2 has continued into quarter 3 with sales being up 0.9% between 1st of January and the 22nd of February of this year. Like-for-like sales over the same period were down 0.7%. We're encouraged by this improvement compared to quarter 1 and quarter 2, but are conscious that the retail environment remains tickle with consumers having less disposable income and being more influenced to shop at the big promotional events. This means we need to continue to execute well, particularly while foot traffic in our shopping centers remains soft. Our strategy for maximizing gross profit dollars has continued to pay dividends so far in the second half with our gross margin percentage in line with that of the comparative prior period. So in conclusion, Shaver Shop remains very well placed to benefit from the continued acceptance of men's and women's DIY personal grooming. We have a unique specialty retail model built upon exceptional customer service, unparalleled product knowledge, depth and breadth of range with a high percentage of our sales and gross profit coming from exclusive product lines and compelling value for money offers to our customers. This positions us well to end the year strongly and return to growth as consumer sentiment improves. That concludes our presentation. We'd be pleased to respond to any questions you may have.

[Operator Instructions] And your first question comes from the line of Andrew Johnston from MST Access.

Well done on a good result. It looks like you had to work pretty hard on a couple of fronts to get all the numbers together. So well done on getting there. A few questions. I'll start with ones around runs around the product. So we saw a shift in the product mix and the shift in supplies as well, and we saw some numbers come -- change in payables come through as a result of that. Has there been any significant change in the percentage of exclusive products that you're selling as a result of that shift in product mix?

Andrew, it's Cameron. In terms of percentage of sales from exclusive product lines, no, there's been no material change at all. So pretty consistent in terms of revenue derived from those exclusive product lines.

Okay. Just some -- can you make any more comments around your store software that you're rolling out. That looks like it's a combination of both customer facing as well as internal. Is that correct? Can you give us any more detail around that?

Yes. Unfortunately, Andrew, I can't give you too much more detail on that, although it does touch, as we say, customer and internal touch points. But today, technology platforms, basically all of our platforms are linked in one way to one another, if they have a financial impact. And so all the integrations that happen between those systems are core for us getting right. That's why it takes a while for us to get through that investment process. I don't want to go through too much more detail, but it is a core platform. We're looking to get it up as soon as possible.

Okay. And in terms of -- and probably this may link into the last question. But in terms of your social media presence and the ability just to drive sales from your social media presence, how is that -- I know you've had some pretty good improvements in that over the last couple of years. How is that tracking now?

Yes, I'm happy to take that, Andrew. Look, hopefully, you've seen yourself, we're being a lot more active in that space in terms of social media activity. We've long said that we'd like to be leveraging our product knowledge that our store teams have and using those personalities across social media platforms, and that's really what we've been able to execute over the last 6 to 12 months, really tapping into the folks at store level and helping position Shaver Shop as the category and product matter experts. So I think we've developed significantly across our social media platforms over the last 12 months, and that's certainly helped, in part, drive some organic growth through search as well. But it's fair to say that we're still probably 50% through the sort of road map that we have in terms of getting to the position we want to as a brand across social media platforms.

Okay. I'm impressed that you thought I might spend enough time on social media to have noticed the difference. I didn't, but...

I was trying to be generous with you there, Andrew, so... I'm not sure I'd take you for use of any...

I'm probably not the target customer, unfortunately, either, but on a couple of accounts. I'll leave it there. I might come back later with a question around capital management and M&A, but that's enough for now.

Your next question comes from the line of Patrick Lebourdais, investor.

Yes. Just wanted to come back, in fact, about your capital management. On Page 12 of your slide, you mentioned we consider capital management options. So can you give more details about this?

Yes, I'm happy to take that one, Patrick. So at the moment, with the Board wanting to retain, as I said in the presentation, a strong balance sheet and liquid financial position, we're hopeful that over the next 6 to 12 months, there might be some investment opportunities that will be accretive for shareholders where we can deploy that capital and generate incremental returns. But I guess if that doesn't come to bear, then the Board is always considering other capital management alternatives. And at the present time, we're choosing not to pursue those. So I hope that answers your question.

Yes.

[Operator Instructions] Your next question comes from the line of James Casey from Ord Minnett.

I just wanted to ask a question in relation to foot traffic. So I think foot traffic declined slightly in the second quarter. Your sales have improved thus far in the second half. Just wonder whether you could comment on the foot traffic observations or data you've seen in the second half '24 so far?

Second half '24 is still pretty consistent actually with the second half -- second quarter of the year. So it hasn't changed materially. What we've seen is outside foot traffic continue to be well down on the prior comparative period. Our ability to actually attract those customers into our stores improved versus last year. So our shop front conversion has improved, which is pleasing. But still outside foot traffic at shopping centers based on the numbers we collect is still well down on last year across Q2 and Q3.

So down kind of low teens still.

Yes.

Yes. Okay. And just a final one, just on your debt facility, Larry, is it that's around $30 million from memory. Is that about right?

Yes, it's $29.5 million. So there's a $10 million trade finance facility and then a term facility as well, a $19.5 million term facility. Those are looking to be renewed around the 31st of July.

'24?

Yes.

That does conclude our Q&A session for today. I would like to hand the call back over to Cameron for closing remarks.

Thank you. Just in conclusion, Shaver Shop is a segment leader both online and offline. We are a large and growing market, driven by changing consumer preferences and new product innovation. Our products range is applicable to almost all consumer demographics, and importantly, we are a differentiated and resilient specialty retail business model. Our fundamentals rely on service excellence and unparalleled product knowledge, product exclusivity, as we've covered off through today's presentation, and offering competitive value-based pricing. We do believe we have an opportunity to further increase our market share, particularly within specific categories. We have high brand awareness in Australia. New Zealand brand awareness is growing. We have a proven and highly profitable omni-retail model. We have a clean balance sheet, no debt, with high cash conversion. We have an experienced Board and management team. We're focused on investing for growth and improving total shareholder returns. And hopefully, everyone would agree we have attractive dividend payout and fully franked dividend yield. So in conclusion, thank you for everybody's participation today. We appreciate everybody's support. Thank you.

This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.