Is Now the Time to Buy Shaver Shop Shares — Bargain or Trap?

Is Now the Time to Buy Shaver Shop Shares — Bargain or Trap?

Yesterday, Shaver Shop Group Ltd [ASX:SSG] dropped to a 52-week low. The stock traded down 12.66% to 69 cents. Not a great start to the year.

You’ve probably heard of the Shaver Shop before. It sells grooming and personal care products. But it only made its way onto the ASX on 1 July, 2016.

Since listing, the company has been assessing its stores on a case-by-case basis. You see, Shaver Shop is a franchise. And the company sees value in buying back its stores. Last year, it completed one buyback in July and three in August.

Future growth drivers include the company’s greenfield store rollout, and the $387 million ‘wet shave’ market. Yet because Shaver Shop has a limited trading history, it’s likely investors will want to see more before jumping into the stock.

Today, Shaver Shop announced its December and first-half sales. In December, total corporate store retail sales totalled $27.8 million. This was towards the upper end of the company’s $26–28 million guidance. Sales for the half were up 16.3% to $78.5 million.

It was enough to encourage investors to bid the stock up 3.91% to 71.7 cents per share.

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The potential in a bad situation

What to do? Get in now because Shaver Shop is 30% below its IPO price and growing sales? Or stay out because the market isn’t safe with Amazon.com, Inc. [NASDAQ:AMZN] coming to town?

It’s a tough situation. To understand a little more, we need to know why Shaver Shop is where it is.

Some might say the company didn’t get off to the best start. As reported by The Sydney Moring Herald on 23 December:

Shaver Shop has emerged as the latest dud share market float of 2016, warning investors that weak pre-Christmas sales will leave earnings short of the forecast included in its prospectus which was issued mid-year.

Also putting pressure on the stock was rumours of institutional investors selling off the company. But does this simply mean Shaver Shop is in a prime position to trend up from here?

Again, it’s hard to say. It would be better if we had more data on Shaver Shop. What data? Years of sales, profit and cash flow figures.

In the absence of data, we need to look at the potential of Shaver Shop appreciating into the future.

Is it likely that Shaver Shop can grow earnings for years to come? It certainly operates in a niche market. In the future, will it be forced to lower prices to remain competitive in the grooming market?

Maybe not. Maybe it can grow earnings and continue to gain market share. And if so, now is the best time to get in. It stands to reason that when times are tough, stocks are at their cheapest. And if you’re certain the company can grow earnings and continue to prosper, why not buy now?

Yet, like I said before, bricks-and-mortar retailers aren’t safe. And I’m not just talking about Shaver Shop. Woolworths [ASX:WOW], Coles, Target and the Reject Shop Ltd [ASX:TRS] are all at risk. Amazon is coming.

Your margin is our opportunity

Amazon is a special type of creature. There is a reason why it has been so successful and is now the ‘Everything Store’.

Amazon has the ability to price competitors out of the market. It has a system that collects price points on everything. Then it sets its prices at a 30% discount.

Justin Braitling, Chief Investment Officer at Watermark Funds Management, is well informed about Amazon’s plans. He received a special briefing from the person rolling out Amazon’s Australia strategy.

They [Amazon] will be dropping distribution centres and performance centres in every state next year.

They will be doing general merchandise and they will be doing fresh as well.

They will also be putting physical stores on the ground which I don’t think anyone knows about.

These will mainly be in regional areas because fulfilment is a lot harder in regional areas than in the cities.

We spoke to the guy rolling out Amazon’s business here in Australia and in his words: “We are going to destroy the retail environment in Australia”.’

This is just an assumption, of course — Amazon destroying Aussie retail. We won’t know until it actually happens. But investing in Shaver Shop now really depends on whether you think it can grow from here.

The company is planning to roll out 10–15 stores per year through FY19. Eight greenfield sites are already committed for FY17. The company is also waiting for 26 stores to reach maturity. Will it be enough to safeguard its future before Amazon makes its big entrance?

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

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