Can The Good Guys live up to their great expectations?
The Good Guys are about to start a roadshow to canvas interest in an IPO, and management is talking up a boost in future store numbers. Prospective investors should consider whether a big store rollout is feasible in such a competitive market, and whether future stores will be as profitable as current ones.
We think it pays to exercise greater caution when valuing IPOs as typically a forecast period is emphasised over a few years of financial history (it is rare for management of listed companies to explicitly forecast periods greater than one year).
In this instance, The Good Guys is reportedly guiding towards opening 20 to 25 stores in the next five years, but 40 new stores may be possible. The company had 97 stores in 2012 and has 101 stores today. In this context, opening an additional 25 stores in the next five years is a considerable increase, though we have identified a number of factors which may support this expansion.
The company has reportedly reinvested in centralising its systems in recent years, which may have constrained capital for store openings. An improved system, combined with a healthy capital injection from an IPO, could support the company’s expansion plans. The collapse of Dick Smith may also be viewed as an opportunity to grow store numbers, but the companies have different business models in what is a highly competitive market.
So while it’s possible for The Good Guys to grow its store base, we will be careful to not let the 40 store target serve as an anchor with our modelling.
We must also be cautious about using the profitability of existing stores when modelling new store openings. While increased scale will help group profitability through greater buying power and efficiencies, the existing store network is mature and it’s likely that the easy fruit has already been picked. This is important to consider in the context of JB Hi-Fi’s HOME roll-out, where it is slowly expanding to 75 stores and initial profitability has been lower than expected.
We are looking forward to the management roadshow as The Good Guys does have attractive prospects as the third largest player in a consolidated market. But it is for this reason that we will exercise caution with any guidance for increased stores.
Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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