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Dick "Solid" But LFL Sales A Concern

By Oonagh Reidy | Friday | 21/02/2014

DSH delivered a solid profit result, but comparables sales flagged by analysts

Newly floated Dick Smith this week announced strong first half (H12014) sales of $637 million or 52% of FY14 forecast, and net profits of $25 million or 63% of the forecasted $40m for full year.

While "sales were slightly below target, better-than-expected cost reduction offset this," says CIM analyst Daniel Broeren in an investor note. 

However, the retailer's like-for-like sales was flagged as a concern, falling 1.3% in Australia, reflecting underlying discounting experienced in H1 2013, but fell 26% in NZ.  

H1 ike-for-like sales growth for Australia was well below growth of 2.4% in 1Q14 and pro-forma expectations of 0.6% growth for FY14. The revamped retailer opened 46 stores in H1 2014 alone, and plans to open three new Move "fashtronics" locations, seven new Dick Smith's and close three in H2.

"The key focus for investors going forward is the delivery of like-for-like sales growth," and comparable sales momentum will be "a key focus" for the retailer.  

Dick Smith management confirmed LFL sales declined in 2Q14 as it cycled a major inventory clearance, but to hit the FY14 pro-forma target, growth of around 1.5% is needed in H2.

Dick Smith may have to implement higher promotional activity to achieve LFL momentum, says Broeren. 

"The company lifted its brand exposure and promotional profile in 1H14 with the aid of supplier funding. If a meaningful like-for-like sales improvement is not achieved in 2H14, we would need to reassess our overall view of the stock."

While DS confirmed its pro-forma sales target of A$1,2 billion, it did not reaffirm like-for-like growth specifically, Broeren notes. 

The fact Dick Smith is opening 7 new stores in the next six months (not announced in the investor prospectus), may suggest additional space growth is required to fill a small shortfall in comparable growth. 

CIMB retained its 'Add' rating, with the current share price undervaluing the opportunity for further cost reduction and the strong balance sheet. 

However, analysts revised downwards FY14F EPS by 9% to 18.4cps and blended price to A$2.40. 
On Dick Smith NZ, aggressive action is needed, the CIMB analysts warns, and have already cut FY15 sales forecast.   

DSH has recently taken action to consolidate its NZ head office, comes on top of major in-store labour cost reductions over the past 12 months. 

"Our concern is that cost reduction continues to negatively impact like-for-like growth (down 25.9% in 1H14)."

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