Does Dusk Group (ASX:DSK) smell undervalued? It all depends on what consumers do with their Stage 3 tax cuts

Dusk Group (ASX:DSK) purports to be Australia’s favourite home fragrance seller. But investors were not sharing the love for it during 2022-24, as has been the case with many retail stocks. As consumers have cut back their spending, there have been perceptions that companies are being hit, and while this has not always been true, it has been the case with Dusk.

The company’s shares made some recovery in FY25, only for that ground to be lost when Trump imposed his tariffs on the world. Will FY26 be better? It could be, if the company’s plans pay off.

Who is Dusk Group?

Dusk sells home fragrance products such as candles, diffusers, air purifiers and essential oils. It traces its origins back to 2000 when Perth businessman David Stratton opened the first store. It was acquired by retail conglomerate Brazin in 2004 for just $24m and was sold in 2010 to Catalyst Investment Management and Brett Blundy’s BB Retail Capital.

Dusk Group listed in 2020 at $2 per share, a deal that gave the company a $124.5m market capitalisation (10x P/E). By that time, it had 115 stores across the country. After a nuanced debut, shares rose as high as $4 in mid-2021, but it was been all downhill until mid-2024 when shares bottomed out at $0.60 per share. Shares recovered to $1.20 over the next few months, only to retreat once more.

Dusk Group (ASX:DSK) share price chart (Source: Google)

Why did Dusk Group rise and fall?

Dusk Group’s share price rose because their sales did substantially during the pandemic. People stuck at home opted to spend their money on homewares. The company’s sales in FY21 increased by over 47% and it more than doubled its post-tax profit from $9.5m to $21.9m. Also helping the company was Wilson Asset Management accumulating a substantial position in the company.

But as the economy returned to normal, so did this company’s sales. Adding insult to injury, marketing and freight costs all added up as inflation spiked to 4-decade highs. In FY22, its sales declined by 7% to $138.4m, even though this was 37% higher than FY20. Like-for-like sales declined 10.5% and Dusk’s NPAT declined by 31% to $18.5m.

FY23 continued the decline in sales (especially online sales) and margins. Dusk’s revenue was only slightly down, at $137.6m, but its profit was $11.6m. Even though FY24 sales were a further 8% down, at $126.7m, sales improved in the back half of the year. Its gross profit margin was up 0.2 percentage points and it paid a dividend of 6.5c per share.

Dusk’s inventory declined by $0.3m and its net cash grew from $20.8m to $25m. It has over 674,000 reward members – we’re not talking just those who signed up to receive marketing emails, we’re talking people who paid just to be members. They have historically accounted for more than half of total sales. Now, the company made a decision to increase the sign-on free from $10 to $15 in mid-2023 and this saw some drop-off.

Dusk saw it had made a mistake, reverted it and saw many come back in the first few weeks of FY25. It told investors sales in the first 8 weeks of the year grew 16% on a group-level, 12% on a like-for-like basis and 39% online.

In the first half of FY25, it recorded 12% sales growth and 20% EBIT and profit growth – the latter was $9.5m.

For the full FY25, no specific guidance was given, but Dusk stated in mid-May that it expected $137-139m in sales (up 8.1-9.7%) and an underlying EBIT of $7-8m (up 13-29%) for FY25. Crucial for the company was the busiest time of year for it – not Black Friday or Christmas, but Mother’s Day.

What does the longer-term future hold?

Beyond FY25, the company told investors it had big plans for FY26 including new product ranges, category expansion, updating its branding and extending its growth to sub-events all year around including Father’s Day, Valentine’s Day and individual birthdays. All businesses will have busy times of the year, but they cannot have the bulk of revenue come in during just a few weeks of the year.

One challenge it faces is that members now account for less than 50% of sales. Although it has seen some new customers aged 15-22 (both males and females), the challenge will be getting them to be paid-up members and winning new customers over.

Turning to consensus estimates, they agree with the company’s guidance for FY25. For FY26, they call for $147.4m revenue (up 7%) and $0.12 EPS (or a $7.5m profit). Then for FY27, $156.6m revenue (up 6%) and $0.15 EPS (or a $9.3m profit). The mean target price is $1.40 per share, well ahead of the $0.77 share price it is at now. These estimates put the company at jus 9.5x P/E for FY245 and 6.4x for FY26.

If DSK was worth 10x P/E at its IPO and deserved to be now, it should be trading at $1.20 per share.

Dusk likely to rebound

A key challenge for the company will be that there’ll be no Stage 3 tax cuts during FY26. Another will be the market volatility with Trump’s tariffs. We would also warn that any delay in interest rate reductions would be fatal to consumer sentiment generally, particularly to a company like Dusk that has born a burden greater than most other companies.

But this is a company undergoing an evolution from what it was a few years ago, growing its year-round revenues and reaching out to new target consumers. This is one to watch for the future, but not necessarily one to jump right into right now. We’d prefer to wait until its FY25 results next month when we may have more details on the company’s future plans, as well as how the new financial year has begun.

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips