Buying a discretionary micro-cap retailer that relies heavily on seasonal trading, is exposed to competition from Amazon, and has had poor returns is about as hard as it gets with contrarian investing. But every stock has its price and that might be the case with Shaver Shop Group.
Granted, that’s a tough case to make. Discretionary retail stocks have been hammered as consumers feel the pinch. High debt, falling property prices, sluggish wages growth and rising utility costs are pressuring household budgets – and weighing on economic growth.
Australia’s latest reported Gross Domestic Product (GDP) was weaker than expected, partly because of lower household consumption growth.
Shaver Shop and other small retailers that rely on seasonal trading events are particularly exposed. Expect more households to cut back a little this Christmas, buying fewer gifts or cheaper ones, or waiting until the Boxing Day sales to buy discounted goods.
The Amazon factor is another threat for discretionary retailers. Investors were paranoid about the US e-commerce giant when it announced plans in 2017 to expand here. The view now is that Amazon is having less effect than first feared. That looks complacent.
Amazon has a history of starting slowly in new markets as it develops its product offering and logistics, before aggressively ramping up sales. Commoditised products, such as cheap electrical gadgets that are not too bulky, are ripe for disruption by Amazon.
Taken together, this is an awful backdrop for Shaver Shop Group, a $98 million float in June 2016. The company’s $1.05 issued shares rallied to $1.21 a few months after listing, before drifting lower over the next three years. They are near an all-time low at 37 cents on low volume.
The market looks like it has lost patience – and interest – in Shaver Shop, a specialist retailer of grooming devices. The share price fell by a third when the company’s full-year result disappointed. After-tax net profit fell 20 per cent to $7.2 million in FY18.
A lower contribution from its Chinese distribution channel (Daigou); earnings margin compression from product discounting to clear slow-moving lines; and lower franchise royalties and franchise buybacks below expectations weighed on the result.
With several small retailers going into administration in 2017 and 2018, investors are right to ask if Shaver Shop has a future given retail conditions and competition. This is not a stock for the risk averse or those who lack experience in micro-cap investing or do not understand the challenges of thinly traded stocks.
Shaver Shop has many challenges, but also some good traits. Net debt of $8.4 million at June 30, 2018 is conservative and down a little on FY17. Strong growth in operating cashflow to $15.5 million in FY18 is another healthy sign because it means more growth can be funded internally.
Operating costs were down slightly in FY18 (after excluding the reduced contribution from the Daigou sales channel) and inventory declined 11 per cent despite 11 new stores. That suggests Shaver Shop is working hard to reduce costs and respond to challenging conditions.
The company is still expanding its store network, opening 8-10 greenfield sites annually, mostly at shopping centres. With 115 locations across Australia and New Zealand, Shaver Shop has a decent footprint in its market and scope to drive greater economies of scale.
Shaver Shop’s online sales are growing quickly (47 per cent), off a low base. Online sales are now about 10 per cent of the group’s total sales, so it shows the company is responding to the online threat by building a stronger blended physical/digital offering.
The long-term thematic – younger consumers spending more on grooming – is still one of Shaver Shop’s best selling points. The personal hair-care and beauty category is growing at 6.4 per cent annually, more than double the economy’s growth, as Millennials spend on grooming.
Fancy electric shavers are other grooming devices often bought as gifts, a reason why Shaver Shop relies so much on Christmas trading. I suspect many gift buyers, such as younger people buying presents for their partner, want in-store advice on what to buy and will pay a little more for that compared to buying a shaver online.
Thirty-eight of Shaver Shop’s top 50 products are exclusive to the group, meaning it has some defences against online rivals selling commoditised grooming products.
As always, the key issue is valuation. At 37 cents, Shaver Shop is on a trailing Price Earnings (PE) ratio of about 7 times and yielding 11 per cent, fully franked. A couple of broking firms that follow the stock have price targets around 50 cents, but do not read too much into that.
The insightful share-valuation service, Shareanalysis, estimates Shaver Shop is worth 45 cents in 2019, 56 cents in 2020 and 59 cents in 2021. If Shareanalysis is correct, Shaver Shop offers some value for contrarian investors with a three-year view.
Microequities Asset Management, a good judge of microcap stocks, is a substantial shareholder and Shaver Shop bought back almost 3.3 million shares in the year to November 2018, so clearly believed its scrip was undervalued.
My hunch is that Shaver Shop’s share-price return will worsen before it improves, such is the retail malaise, broader market correction and lack of an obvious near-term re-rating catalyst.
The stock looks cheap but might get cheaper yet in this falling market – a reason why contrarians should have it on their watchlist.
Chart 1: Shaver Shop GroupSource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at December 10, 2018.