Ann: Change in substantial holding, page-6

"Can you please point out what changed in the business for the earnings to go from less than 10cps for the years before 2020 to over 15cps in the last 3 years? 2020 was a poor year as you would expect because of COVID. But since then until this year things really improved"

Two factors:

Firstly, BLX's retail footprint has grown (from around 85 stores a decade ago, to 123 stores currently, so a 40% increase). Rolling out new stores is a big driver of earnings growth.


Secondly, increased Revenue and hence, Gross Profit per store (a common retail sector phenomenon which arises due to the time it takes for new stores to reach sales maturity - normally 2 to 3 years). (FY2024 metrics are from my forecasts.)




Note: As rosy as that picture looks, it masks a concern I have with this business, namely that the impressive growth in Revenues and Gross Profits has been offset to a large degree by the lack for fractionalising of fixed costs, meaning that net profit per store has not been leveraged up as rapidly as should have been the case:





Remember that this is per store profitability. It differs from total profitability to the extent that the number of stores is increasing, so while per store profits are falling from the cyclical peak, the bottom line isn't falling as fast.

But that picture provides a good segue into your question/concern of, "What im worried about is the company going back to the 8-9cps earnings and not much growth."

EPS of 8-9cps equates to NPAT of $19m, or $27.5m Pre-Tax, normalised.

Per store, that works out to $27.5m divided by 123 stores, which is around $0.22m per store.

Comparing that with history, it would mean we would be back below pre-Covid levels (the FY2019 result was unusual, as it included a significant investment in new stores, as well as distribution, and also coincided with a share weakening in the A$, which hurt the GP Margin) in terms of per store profitability.

While I think it is possible, I'd consider it highly unlikely, so much so that I think it is not sensible to invest with that sort of outlier event in mind.

Because for that scenario to occur, the world would have to be in a pretty parlous shape, I think, and we would probably have far more pressing issues to think about.
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