Retail Valuations are not all bad news
The retail sector has had it tough over the past few years with the growth of online competition, falling exchange rate, increasing rent and less spend by traditional customers. Making profits has been hard at both the big end of town and the small end.
We have seen some interesting reports in Market Matters News Reports on two:
Elsewhere we noted that:
Super Retail Group (Supercheap Auto, BCF and others) profit increased by 11%
Specialist retailer Baby Bunting NPAT up 25% (on proforma results).
So how did the Enterprise Value (EV) Multiples change as a result of the announcements? And what does it tell us about the sector?
Based on share prices on initial announcements, the EV:EBITDA multiples for both JB HiFi and Super Retail Group dropped by about 5 - 10%. So even though profits had increased, the market still factored in uncertainty into the next half results and the share price has not increased sufficiently to result in an increased multiple.
Intuitively this make sense - the retail sector has risk at the moment. Overall retail sales has declined, margins are tight across the board. So it makes sense that these stocks are inherently more risky. It is also worth noting that these are traditional retailers.
So what would happen if we changed the business model or increased the specialistion? Let's look at Breville Group and Baby Bunting as examples:
Breville is technically not a retailer - although they have branded products in many retail outlets. Primarily they wholesale products to retailers - but on a global scale.
Baby Bunting is a new listing to the ASX but clearly have a niche market with a clear focus, but is more of a traditional bricks and mortar retailer. Although the EV:EBITDA multiple is at present trading approx. 40% higher than its larger rivals.
Both businesses at present have attractive EV:EBITDA multiples for the retail sector.
So what do these results mean for the smaller SME retailer? What is an appropriate multiple to use?
Smaller retailers with revenue $2m - $5m are likely to attract multiples between 2.5x - 3.5x, and at low retail margins are unlikely to attract significant intangible value. It is primarily when size and EBITDA margin increases past $10m and 10% that significant valuations result.
In retail sector the message is simple:
You need a good EBITDA margin.
Size and scale counts.
Clear differentiation or niche markets makes it easier to grow and make profits.