Hi. Thanks
To assist:
1a. 'Earnings momentum has been negative for some time'' as mentioned; you need to consider AUDvUSD shifts in 2015 to 2016. If you see the earnings release, the cost of goods sold last year was some $367 million. The USD purchase requirement in 2016 of some $168m USD or $212m AUD at an exchange rate of 78 cents is set out in note 29 of the 2016 accounts, being the hedges outstanding at 30 June 2015 for 2016 financial year purchase needs, with a hedging policy of 100% of need. Now, compare that to the 2015 year, where at the end of 2014 the hedge commitment for 2015 purchases was $133m AUD at an exchange rate of 90cents. That is, the effective movement on $200m of currency swapped in 2016 is massive at 90/78 being some 15% on exchange in AUD cost!
The company's direct sourcing and supplier cost pressure initiatives assisted to partly offset the impact on margins, however only so much is achievable in the time period between the two years which meant the full effect was unable to be mitigated.
That is, allowing for currency and Rivers business unit losses, earnings momentum has been quite positive. Further, CODB performance has been pretty good; employee expenses fell and rent expenses stayed flat despite some 4% revenue uplift in 2026 and 'other expenses' fell by $5m. The company quoted a reduction in COBD of 3% of sales., or some $7m.
In addition, margins at the end of 2016 were also impacted by the winter stock discounting, which to be fair for SFH, the milder weather also caught out many other retailers, see Solomon Lew's media commentary elsewhere etc.
I encourage see through into underlying earnings analysis at play.
1b. Regarding the warehousing savings; the full savings effect of the Rivers Ballarat closure yet to be fully realised in 2016 as it occurred part way through 2016. On the new facility, an overall reduction in costs quoted, not sure by how much.
2. Regarding net debt; please see page 6 of the 2016 results pack, third bullet point and again on page 17. Simply $32.2m in debt less $18.9m in cash. No mystery here and hopefully the bank and auditors agree with the same net number otherwise all will be strife!
Therefore, EBITDA of $35m (assuming nil growth and Rivers moves to break even only), less capex of some $14m, allows net debt to be paid off in full given no dividends, even allowing for some interest etc. Working capital improved last year with increasing sales, benefits of higher on line sales and other initiatives, albeit some increase can also be accommodated.
So, I have to point out your net debt analysis is flawed. The company exited 2015 at net debt of $27.8m.
3. Therefore, EV is $97m.
4. Forecasting USDvAUD. Following on from point 1a. above, if you look at the note 29 of the 2016 annual accounts, you will read the company hedges 12 months toward purchase requirements. In layman's terms, the currency impact for 2017 is known, given contract hedge commitments in place at 30 June 2016.
In respect of 2018 and beyond, given we are at some 73.5 cents, it a commercial and investor call whether sufficient downside protection now exists at current levels. I suspect the company can continue to make money in the mid to high 60's. A key item in fundamental earnings analysis; we need to have an idea otherwise I'd encourage that you'd be best to avoid trade exposed investment securities altogether. I'm personally a lot more comfortable at 73cents than 90 cents in terms of forward outlook.
Looking forward to the 2017 half year earnings release as to whether your view on Rivers improvement will not occur. The Board, as recent as the AGM, being some 4/5 months into trading continued to confirm Rivers would be ending losses in 2017. They will deserve a lot of scorn if this does not eventuate.
5. On line penetration; I encourage you to look into the penetration of 'click and collect' sales data closely; refer to the detailed disclosure in the earnings releases. SFH is market leading on this, which augurs well for the impending commencement of Amazon in Australia, amongst other industry changes. The current and growing rates achieved are not to be dismissed lightly; many retailers would pay a lot of money to achieve the same penetration of sales rates and this has real and sizeable commercial/fundamental value for an investor.
6. Millers and Katies store refresh programs; these appear to be achieving tangible results, which I believe the company has quoted at some 15% uplift. The issue of loss making stores does exist, hence the closure program each year. Again, my own commercial call is that significantly more opportunity exists to improve the overall net EBITDA margin from the current 4% level than the contrary.
Let's revisit on earnings release in February. All the best.
Expand
