Some high-profile ecommerce bloodbaths in recent weeks have (rightly) got ASX retail investors asking a few questions.

Was the post-COVID online surge just a one-off event, rather than a structural change?

Have reports of bricks-and-mortar’s demise been exaggerated?

To seek answers, Stockhead got some in-depth analysis this week from Danny Younis — resident retail expert at advisory firm Shaw & Partners.
 

ASX retail — the ecommerce re-rating

“The first thing the market’s focusing on is, what do these pure-play online businesses look like post-Covid?” Younis said.

“From an enterprise value (EV) to sales perspective, you’ve seen online rerate from 3.5x sales to sub-2x at the moment.”

Market data from REITs (Real Estate Investment Trusts) shows foot traffic is increasing at shopping centres, he said — a positive indicator for physical store networks.

However, Younis added a note of caution for investors who have rushed to the exits on 2020 market darlings such as Kogan.com (ASX:KGN) and RedBubble (ASX:RBL).

“I think it would be very presumptuous and early to write off the online growth story,” he said.
 

Online retail — the nuance

For starters, COVID-19 acted as a catalyst for Australia to play catchup to global peers.

“Pre-Covid, in the US and UK online broadly made up 15-20% of sales whereas in Australia it was only 7-8%, so we were really lagging,” Younis said.

The pandemic was a “sugar hit”, but “in my view (online penetration) will continue to increase — albeit not as aggressively as the Covid period,” he said.

“For us to get to that 20-25% level it’s probably going to take another 3-4 years, and that’s been borne out by independent research,” Younis said.

So in terms of online penetration, Aussie companies still have some catching up to do. And they need to be doing more of this:
 

Customer relationship marketing (CRM)

From the big grocers (Woolies and Coles) through to ecommerce microcaps, there are around 60 ASX-listed retailers.

“I reckon 90% of them don’t have a CRM or loyalty program currently running, which is extraordinary when you think about it,” Younis said.

“The customer makes one purchase in-store or online and that’s the end of it.”

It means key questions around consumer behaviour remain unanswered.

“The use of data analytics is very poor here compared to rest of the world,” Younis said.

A lot of ASX retail companies monitor data such as active customers, which is customers that make at least one transaction in a 12-month period.

But “they’re not gathering the data on their customers’ spending habits when they log on”, Younis said.

“We’re behind the curve on that front, and it’s an area where online players really need to get up to speed.”
 

Valuing ASX retail

Omni-channel distribution, logistics, supply-chain management — retail is a sector with a lot of moving parts. So how should investors appraise companies in the space?

Younis began by explaining what he doesn’t do.

“The market always looks at EBIT but I’m less focused on that because you always play around with operating expense lines and non-cash items like depreciation and amortisation to make the result look better,” he said.

There’s also “far too many companies these days providing multiple EBITDA metrics like normalised, statutory and underlying”, he said, which has been exacerbated by recent changes to the accounting standard (AASB116) for leases.

Another common barometer in retail is comparable sales on a prior (yearly or monthly) period.

For example, investors have so far been pretty ruthless on high profile ecommerce stocks that haven’t maintained comparable growth rates to the post-Covid boom.

“It’s an easily digestible market metric but it’s another one I’m a bit critical of,” Younis says.

To get down to the nuts and bolts, Younis focuses on gross profit margins (GPM) — a retailer’s revenue less the cost of the goods it sells (divided by the revenue).

The actual margin itself is less important. Some ASX retailers runs GPMs above 60, whereas other are closer to 20.

“The critical thing with GPM isn’t the number, it’s how it has trended the last few years and how the trend looks going forward,” Younis says.

Then there’s two other key sales metrics — average order value (AOV) and average order frequency (AOF).

“Like GPM, the AOV can vary depending on the nature of the business but you want that number to be increasing each year. And for AOF, you want to see customers that are transacting at least 2-3 times per annum,” Younis said.

Operationally, it’s companies which have a dedicated CRM strategy that will stand out in the domestic market, he added.

“You want to see a loyalty or CRM program implemented, with evidence they are leveraging that customer data to resell products and build targeted marketing campaigns,” Younis said.
 

Bricks-and-mortar case study

Lastly, Younis provided some analysis on 2020 market entrant Dusk Group (ASX:DSK), which listed in November.

Shaw and Partners acted as joint lead manager for the IPO, which raised $70m at $2 per share.

After falling initially, shares in DSK have risen above $3 and the company occupies a separate niche to pure-play ecommerce stocks with a dedicated bricks-and-mortar strategy.

Dusk runs a network of 120 stores selling homewares such as candles and oil diffusers.

Its online sales contribution rose from around 7% to around 12% in the pandemic, so it “wasn’t a massive beneficiary of the online boom relative to some its peers, who doubled or even tripled online penetration through COVID”, Younis said.

But in assessing a bricks-and-mortar vs online approach, investors need to look at what a business is selling.

“A typical Dusk customer wants to smell the fragrances and feel the candles, so physical stores will always be an important part of their business,” Younis said.

Whether it’s bricks-and-mortar or ecommerce, the same valuation metrics apply. Dusk operates at the higher end of the gross-profit scale, with GPMs of around 70 per cent.

“We got some pushback at IPO, where investors were saying ‘this is just a candles business’,” Younis said. “But they’ve expanded their product mix, they have an excellent management team with a strong omni-channel model.”

Of the 60 or so ASX retailers, only jewellery store Lovisa (ASX:LOV) runs a higher GPM, Younis said.

“It’s still only trading at around 7x PE and you’re getting an 8-10% dividend yield, so that’s a profitable business that I think represents good value in this market,” Younis said.

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