Pinned straw:
There's been an interesting bifurcation in retail land over this reporting period. Retail that have a brand or "moat" if you will, have been quite well insulated through their own pricing power. The guys like DSK (and MBH another low quality retailer I follow) just don't have the ability to pass on costs, and as the covid retail spending pattern drifts into history they are just reverting what they looked like pre-covid. Easier to paint a picture of a crumbling consumer struggling with cost of living than to just admit your business is average at best. I think that is what is happening to DSK
Pre-covid, DSK was a business with ~65% GPM and 55% CODB. They will probably settle somewhere around that. The broader issue though is how much growth is left in the business? When they came to the market they had ~112 stores (up from 96 in 2018), now they have 151. How big is the candle market in Australia? To me it seems like all the easy runs are on board. It was a classic PE play, imo, a proven store concept with reasonable unit economics that tosses off cash and has low upfront costs and a bit of a growth runway. Without the growth angle, it's hard to see this being a takeover target, but maybe I'm undercooking how many stores are possible. Had covid not happened perhaps the PE owners would now be bringing DSK to market having captured most of the growth but while still being able to sell the growth story.
So, I guess you could foreseeably see in a few years 155 stores doing ~$132m in sales at a 5% NPAT margin ~$6.5m give or take. So $6.5m NPAT for a largely ex-growth small cap retail business it's hard to see it trading too far north of 12x earnings and more likely between 8-12x. However, I think there is still a lot of water to pass under the bridge. And I'm not sure I'd be banking that cash in my valuation as the operating leverage of the business reverses.
Just some rough numbers to illustrate the fragility of that cash position, 1H24 CODB was $36.7m, in FY23 the split was 51/49, the sales split was 62.5%/37.5% and the GPM was 64.6%/63.3% in H2. In the guidance they said sales were down ~7.8% on the same period (2H23: $51.5).
Using those numbers to estimate the cash outflow of H2 (and yes, revenue may indeed improve as the half progresses):
Revenue $47,500
COGS $30,162
GP $17,500
CODB $35,200
Cash operating loss $17,700
I'm not saying that is what will happen, there are obviously things a business can do to mitigate costs, but getting stuck in a stock with unravelling operating leverage can be a dangerous place. I'd also not there was a ~$5.6m increase in payables. I assume this will have to be unwound at some point in this period or the next.
It's just one I'd rather take a wait and see approach with.