Does Dusk Group (ASX:DSK) smell undervalued? It all depends on what consumers do with their Stage 3 tax cuts
Nick Sundich, July 23, 2024
Dusk Group (ASX:DSK) purports to be Australia’s favourite home fragrance seller. Investors haven’t been sharing the love for it as of late, 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. However, we think there’s a chance that fortunes could turn in FY25, if consumers open their wallets once more.
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 has been all downhill since.
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 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. In 1HY24, its revenue was $77.8m (down 10% from 1HY24) and its profit was just $8m (down 40%). The company is releasing its full FY24 results on August 29 and it has told investors to expect $126.3m in revenue (a further 8% decline). Although it did not give profit guidance, it told investors to expect $6.2-6.4m EBIT, down from $16.5m in FY24. Ouch.
However, it was not all bad news. The company’s inventory has remained flat and its net cash grew from $16m to $20.8m. It has over 700,000 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. In FY23, they accounted for 62% of total sales and spent an average of $57 per transaction. The company has historically paid dividends and has been high-yielding, although this has also been a function of the company’s declining share price.
What does the future hold?
In its FY24 guidance, the company told investors FY25 would be better. It told investors that total sales in the first two weeks were up 28% on the prior corresponding period. The company did not put it down to any specific promotions during that time, its biggest promotion is Mothers’ Day.
Turning to consensus estimates, revenues are tipped to be $137.8m for FY25. This would be 9% higher than the year before, but roughly in line with FY23. Its EPS is expected to be $0.12, which would translate to a profit of just $7.5m, representing an increase from FY24, but down from FY23. For FY26, $154m in revenue (up 12% from FY25 and ahead of the COVID boom) but just a $9.3m profit, depicting continued margin deterioration (6.6% in FY26 compared to 11.8% in FY22).
Dusk looks undervalued
DSK is trading at just 3.2x EV/EBITDA and 5.1x P/E for FY25 and at 2.5x EV/EBITDA and 3.9x P/E for FY26. This generates a PEG of less than 0.2x for the next 2 years.
If DSK was worth 10x P/E at its IPO and deserved to be now, it should be trading at $1.20 per share, over double its current price of 59c.
Dusk likely to rebound…
…if consumers spend their Stage 3 tax cuts, and on Dusk. There are positive signs in the first couple of weeks of FY25, but it remains to be seen if it will be sustained. We would also warn that any hike in interest rates would be fatal to consumer sentiment generally, particularly to a company like Dusk that has born a burden greater than most other companies.
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