Can Shaver Shop continue to prosper now people can return to the salon?

Extended periods of lockdown over the last few years gave many of us the opportunity to ‘go wild’. The hair grew long and scruffy as did the beards. It was somewhat liberating, but for those who still had to front up as presentable on Zoom calls, they often had no choice but to do their own grooming.

The pandemic should have been a very difficult time for retailers as they were forced to shut their doors for extended periods of time due to mandated lockdowns. And it was. But despite that, some retailers have prospered as they managed to adapt their businesses to the new reality and position themselves to capitalise on some of the unexpected behaviours that emerged from consumers.

One retailer that adapted very well was Shaver Shop (ASX:SSG). They are a small specialty retailer, focused not only on shavers but also health, beauty and personal care items. Demand for these products actually increased during the disruptions of the pandemic. Despite their stores being shut for large periods of time, Shaver Shop managed to quickly ramp up their online presence and capture this demand.

But Shaver Shop is not just a pandemic success story. They have increased their sales every year for the last 10 years. They received a big boost from the pandemic, but they still managed to grow sales in 2022 albeit at a more modest rate of 4%, but off a much higher base.

Shaver Shop commenced in Melbourne in 1986. They have gradually built a network of stores across Australia and New Zealand which currently stands at 121.

Total network sales have grown at over 10% per annum for the last 15 years. (Note, network sales include sales from franchise stores. As of FY22 there are no longer any franchise stores as the final six were bought back. All stores are now corporate owned.)

Source: 2022 AGM Presentation, 10/11/22

The question now becomes can they continue to grow as the pandemic abates. The addressable market for health, beauty and personal care products is estimated to be $10B+ in Australia and New Zealand. Currently Shaver Shop only account for about 3% of that.

Source: 2022 AGM Presentation, 10/11/22

Whilst their store network in Australia is fairly mature, with limited opportunities for new locations, there is still a large opportunity online. Further, in New Zealand there is more scope to expand the store network if suitable locations can be found.

Their position is strengthened by the fact that they have a lot of exclusive products. 50% of sales come from these exclusive products and they generate 60% of gross profits. They also rank very highly on metrics of customer service.

Source: FY22 Results Presentation, 22/8/22

It is the online sales that have grown exponentially over recent years as people changed their shopping habits due to COVID. Online sales of $75.7 million accounted for 34% of sales in FY22 having grown from only 10% four years ago. In addition to their own website, they operate online stores on Amazon, My Deal, eBay and Trade-Me. This growth is likely to abate somewhat as life returns to normal. Online sales were down 53% for the period 1 July - 6 November 2022, compared to the same period last year, but that was a time when much of the Eastern seaboard was in lockdown. It was still double the pre-pandemic comparison.

Source: FY22 Results Presentation, 22/8/22

The board has a lot of retail experience with some veterans of the industry. CEO and Managing Director Cameron Fox has been in the role since 2008 after joining Shaver Shop in 2006. This depth of retailing experience reflects in the culture of the business.

Shaver Shop is a very profitable business. Their gross margins are about 44% and they generate a return on equity of 23%. Profits dipped slightly in 2022 but are well up on pre-pandemic levels and remain strong with a net profit margin of 7.5%. They pay generous dividends that are fully franked and are currently trading on a high dividend yield of over 8.5%.

These factors contribute towards a high Quality Rank of 94. The Health Trend score of 6/9 was dragged down a bit by the small reduction in profits along with the build up in inventory which saw a very slight reduction in asset turnover.

The balance sheet is strong with no debt, cash of $9.4 million and growing equity. Cash generation is very strong.

The market capitalisation for Shaver Shop is about $150 million. This makes it a micro-cap stock and off the radar for many investors. About 39% of shares are tightly held by key investors meaning there is a lower level of liquidity in the stock.

Given the high dividends, strong track record of sales growth and profitability it may benefit from a market re-rating at some point. If not, the dividends should still provide a pretty decent return.

Finally, the share price has been steadily rising since the mid-year lows, however it still has a very good Value Rank of 94. The forecast rolling 12 month PE ratio is only 7.9.

All of these factors have combined to give Shaver Shop an overall StockRank™ in the top 1% of ASX listed stocks.

As we come towards the end of the year, Elio and I hope that you and your families have an enjoyable and relaxing time over the festive season.

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