This is not investment advice and does not consider your financial situation. Do your research before taking any positions in the securities listed below.
What they do (in case you've been living under a rock)
$BLX is a specialist retailer of lighting, ceiling fans, and energy-efficient products in Australia
Their store network includes 110 stores in Australia. While they have expanded overseas (HK & UK), their presence there is limited.
The driver for this buoyant stock price is "Trade Sales," which have increased to 36.5%. Management is targeting 50% penetration by 2028.
Store Economics and Cost of Doing Business (CODB)
• Store economics: Each physical store generates approximately AUD 2.9M (60% of what a Nick Scali showroom would make) in sales (excluding online sales).In making this comparison, it is worth remembering:
Retailers who own the underlying real estate can control rent/CODB better.
Revenue per store is lower vs. premium furniture retailers.
Initial stores do not deliver the same LFL growth as mature stores.
• Margins:
• Gross Margin: 69%
• Net Margin: 9.3% (contracted in the past two years).
• CODB: driven by:
Occupancy and distribution expenses, are exacerbated by the fact immature stores under trade.
Higher staff costs (noting they have historically had a more casual workforce).
Higher depreciation costs.
• Trade vs. Personal Sales:
• Trade sales show higher online penetration than personal sales.
• Inventory turnover is low due to a diverse product mix (increased from 135 to 150 days).
• Cyclical Retail Nature: $BLX is cycling weaker LFL sales, but it is worth remembering that these can be volatile as shown below
Key Challenges Impacting Net Margins
Lower Product Margins: The product mix has shifted towards lower-margin items and, of course, the unwind of COVID-19 demand.
Increased Operational Costs: Higher salaries, rent (both retail & distribution), and related expenses have been a real weight recently.
Slower Inventory Turnover: Increased from 135 days to 150 days.
Fiscal Year | Gross Margin (%) | Net Margin (%) |
2024 | 69.0 | 9.3 |
2023 | 67.7 | 9.0 |
2022 | 69.1 | 13.4 |
2021 | 68.5 | 12.8 |
Management:
The Robinson family have been proven to not rip off the company through the following items. Examples include
#1 they own various sites directly but don't overcharge for the assets (unlike MinRes)
#2 They have not been overly generous with SBP
Note - the increase reflects the addition of two BoD (Prue Robinson and Daniel Palumbo) #3 Ian Robinson, through his family’s Heystead Nominees, still owns, and has maintained, a 55% in the company.
From a governance perspective, it is not all positive news, Glassdoor shows that their dissatisfaction has often come from:
Paying below-market wages for store managers
Undertrained casual workforce
Even if Glassdoor is naturally pessimistic, this is a risk worth considering.
Valuation:
Growth potential could partially justify the lofty P/E ratio of 22x. Unlike its comps, it has UK expansion potential and a stronger trade sales business.
Compared to the P/E of peers, there are three things you should consider:
$NCK is trading on a similar forward multiple (even if it is not under-earning as much). Plus with $NCK you get a higher ROE (partly due to leverage)
$ADH and $HVN are trading in way cheaper multiples but they trade on low teen ROEs
Compared to the historical average this is high (likely around 16-17x)
Conclusion: $BLX has some compelling factors such as:
The Robinsons are good fiduciaries for $BLX
They generally achieve a c.10% ROA and 17-19% ROE with no leverage
Everything suggests their "Trade Sales" will continue to grow and will likely meet their 50:50 target by 2028
Like many people, I still think the valuation is stretched and the company is probably worth $500-550m (i.e. 17x earnings). As it cycles lower LFL earnings, I also think it could be priced at this lower multiple soon.
Long term, I don't think buying it at 22x or 17x earnings matters greatly because it is a good quality business.
However, in the short-to-medium term, I think if you're paying up (e.g. $3/share) I would like to see any of the factors start to de-risk the share price
higher (i.e. 40%) "Trade Sales"
greater UK traction
greater margin either through CODB savings or sales mix.
Everything above supports that $BLX is a great or close to great business and is half the size of Nick Scali. However, if you were to buy $BLX today at $3/share you need to be prepared for a c.20% drawdown as it is not cheap and LFL sales will continue to trend backwards
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