Thanks to lockdown beards, the share price of specialty retailer Shaver Shop Group Ltd (ASX: SSG) has risen by a whopping 314% since its March lows.
An impressive H1 FY21 update recently showed continued strength fuelled by online sales. Is there room to grow or are there better opportunities elsewhere?
Shaver Shop background
Shaver Shop is a specialty retailer of male and female personal grooming and beauty products that are distributed through physical stores across Australia and an online platform.
As of its most recent trading update, the company has over 600,000 members which has grown significantly over the last year.
In this recent update, the company revealed total sales had increased by 15.2% from the prior corresponding period largely fuelled by a huge 102% increase in online sales growth over the period.
Gross margins are expected to improve by roughly 2% and the company has provided guidance for H1 FY21 net profit after tax (NPAT) to come in between $13.5 million and $14.0 million.
Is the Shaver Shop share price cheap at current levels?
The following is just a back of the envelope valuation simply intended to get a rough sense of value when it comes to Shaver Shop shares.
Looking back on past years, H1 and H2 generate around 57% and 43%, respectively, of total annual revenue.
We know that Shaver Shop’s FY20 sales were $107.5 million. And we also know from the recent update that total sales increased by 15.2%, implying H1 FY21 sales will come in at approximately $123.8 million.
If you were to assume the same half-yearly proportion from prior years remains constant, it could be reasonable to assume H2 FY21 could generate around $91 million in revenue. This would result in an annualised revenue figure of $214.8 million for FY21.
With a market capitalisation of just $149 million, shares do seem fairly cheap relative to sales and earnings (~$13.5 million for H1 FY21 alone), but many retailers are trading on fairly low valuation metrics currently.
Some of my thoughts on Shaver Shop shares
Shaver Shop has been a fairly consistent dividend-paying stock over the years and its policy remains to pay out approximately 60-80% of cash NPAT.
I’m personally more focused on growth rather than income. So for that reason, Shaver Shop is probably not a stock I’d be adding to my growth portfolio any time soon. However, if you are looking for retail exposure with a solid history of paying dividend income, it may be a pretty safe pick.
Whenever a company has done extremely well as a result of COVID-19, I think it can be useful to take a look at the company’s financial performance prior to the pandemic and consider if you think these strong results are likely to continue, or if it might be a once-off event and the company may struggle to maintain the rapid growth rates.
Shaver Shop’s shares floated on the ASX back in 2016 for around $1 per share and got down to as low as 32 cents per share at one point in 2019. Looking back over those years, gross margins have remained fairly low and earnings haven’t really grown too much on a per-share basis, which would explain the share price movements.
As I mentioned earlier though, this is partly an income play in my eyes as evidenced by its dividend policy, so the share price movements aren’t the only thing to consider here.
The company has clearly attracted a huge amount of new customers over the last year or so. The bull case here would be that many of these customers were satisfied with their recent experience at Shaver Shop and they’ll turn into a repeat customer even after the government stimulus completely drops off into this year.
The bear case would be the opposite and assume that customers might’ve had a bit more discretionary income recently and some of these sales might be on a once-off basis.
The truth is, no one knows for certain what will happen to retail spending later this year when stimulus such as Job Seeker gradually reduces. Maybe Shaver Shop will continue on its upwards trajectory, fuelled by buy now pay later (BNPL) companies, or maybe it’ll slow down as real wage growth remains low like it was prior to COVID-19.
These risks apply to all the ASX retailers and I think it partly explains why the valuations are fairly low at the moment relative to earnings.
Summary
I’m happy to sit on the sidelines for the moment for Shaver Shop. Seeing the full-year results for FY21 will be interesting and would most likely change my conviction if the company can demonstrate a continued upwards trajectory in sales and margin growth.
For now, though, buying so close to the top after such a strong run is something I’d prefer not to do, despite the low valuation these shares carry.
If you are interested in other potential ASX growth share ideas, click here to read: 3 ASX growth shares I’d buy for 2021.