HLG - Hallenstein Glasson

[Rawz]

I presume this is sarcasm? No one would seriously base an investment decision on one (notoriously inaccurate) consumer confidence survey?

Partly. I reckon that confidence survey is true. 2022 is going to be a tough year for a lot of households. Wages will not keep up with inflation. And a lot of mortgages are going to get repriced next year. Purse strings will tighten.

Feel like this has already been hashed out on here anyways….

[LaserEyeKiwi]

Seems like we need a catch all “retail” thread for these more general economy related debates.

[Waltzing]

Just stating summary of the survey commentary in the NZ News feeds...no opinion held.

yes retail thread a good idea...

[Beagle]

"choc fudge cake"

No NO NOOOOO!!!

the virus loves this stuff... bad... Bad ... Very BAD!!!

Kiwi Fruit smoothie and banana for breakfest...

Thank you, I am well and truly fat enough already. A fine selection of fruit smoothies are always a feature of the Beagle clan's well stocked fridge...my personal favorite is the Blueberry Bomb https://www.simplysqueezed.co.nz/our-range/smoothies/ Banana's also almost always on hand.

Nobody wants to see me looking like this, least of all me lol

FAT Beagle.jpg

[Balance]

All will be revealed before market opens tomorrow.

[Ferg]

Interesting thought process Fiordland Moose. Thanks for sharing.

Another factor to consider is USD headwinds, often purchases ex Asia are conducted in USD although I note there is a very weak positive correlation between the purchasing power of the NZD and the HLG GP% - FX hedging will be masking/smoothing the impact.

If you take a longer term view on GP and costs, this picture based on the last decade of annual reports tells a story:

Attachment 13339

In summary it's a really boring graph. But boring is good. It shows margin as a % of sales is relatively stable, variable costs are falling (being Selling & Distribution) relative to sales, and admin costs are falling as fixed costs are spread across a higher sales base. The net result is underlying profit (which has "other revenues" excluded) has grown to 13.9% of sales since a low of 8.0% in 2016, although this is the first time it is over 13.6% since 2010. The conclusion is costs are stable, and Management have consistently proven they have costs under control despite the occasional setback or headwind.

If you are seeking something to be concerned about this would the decline in GP% over the past few years being 61.3% in 2018 -> 60.0% -> 58.8% -> 57.4% in 2021. However, this is being mostly offset by a decline in other variable costs over the same time period from 38.5% -> 38.3% -> 37.5% -> 36.7%. Another thing is the reduction in occupancy costs from $5.7m in 2020 to $1.4m in 2021 - is that sustainable? Or will there be increased admin/occupancy costs in 2022 which means the 2021 profit was artificially high?

To others points we need to look at top line sales. Others have mentioned the split of sales (e.g. Glassons in Oz, online growth etc.) but following is a very basic high level graph showing the annual growth in sales and the 10 year compound annual growth rate.

Attachment 13340

2021 was a 10 year spike, partly due to the flat base in 2020. The 10 year annual compound growth rate has ticked over 5% in 2021. Hardly stellar and you would not call this a growth company. It is however stable, predictable, proven and free of interest bearing debt. For decades the business has grown (sales and stores) at what one might call a pedestrian or controlled rate. But that is a good thing. HLG did not jump the ditch all guns blazing which often results in cash flow headaches with high growth in costs and inventory.

Winner often puts up electronic card spend and market share graphs which are handy to know. They might not look so flash but the measure for me is whether the growth in sales exceeds inflation (and if one wants to take this to another level, you would compare it to population growth). The average growth in sales over the past 5 years is +11% per annum. Whether this is a temporary blip / tailwind or the start of something bigger remains to be seen.

In conclusion it is a boring company; it is proven and predictable and the dividends are relatively safe. You are right to time your entry based on macro trends, rather than the micro trends of daily movements. This one is staying in the bottom drawer for me. I am 2 or 3 dividends away from free carry. In the event there is some sort of correction and a price blip downwards, I will accumulate some more.

[winner69]

Maybe some correlation between currency and EBITDA margin. This seems to have broken down in the last couple of years. Brokers are forecasting a 14% margins for this year. I think management will have to be at the top of their game to fight against the currency tide.

Year	NZDUSD	EBITDA Margin	Change in Currency	Change in EBITDA Margin	Notes
2006	0.649732	15.49%
2007	0.736172	17.74%	13.30%	14.53%
2008	0.714949	14.32%	-2.88%	-19.28%
2009	0.635232	11.95%	-11.15%	-16.55%	Recession
2010	0.721623	13.96%	13.60%	16.82%
2011	0.792322	14.00%	9.80%	0.29%
2012	0.810275	15.58%	2.27%	11.29%	Included insurance payout
2013	0.8203	14.79%	1.24%	-5.07%	Management Blamed late start to winter
2014	0.8306	13.06%	1.26%	-11.70%	Management admitted poor product mix
2015	0.740516	14.31%	-10.85%	9.59%	Broker forecasts
2016	0.68		-8.17%

Noodles did this a while ago ….adds a few prior years tonFergs numbers

Noodles comments are still relevant today

[Ferg]

Noodles did this a while ago ….adds a few prior years tonFergs numbers

Noodles comments are still relevant today

Thanks Winner. The correlation between Noodles numbers looks stronger between the NZD and EBITDA, whereas my calculations of the NZD versus GP% were weaker, and getting weaker as years progressed. I would expect the USD impacts COGS, and very little below GP so I am surprised the correlation appears stronger with EBITDA (although EBITDA is a subset of GP). I might revisit but I can see that with Noodles' numbers [...generally as the NZD gets stronger the EBITDA % gets higher but...] this relationship breaks down from 2013 to 2016. Interesting. Maybe it coincides with FX hedging policies? If so, we may need to lag one data set by a year to see if the relationship is stronger.

[Rawz]

Excellent post Ferg!!!

[Beagle]

Thanks Ferg. You'll really enjoy it when you get to the free carry stage. This has been a wonderful ride for me since August 2016 @ ~ $2.70, then to exit pre Covid @ $6.20 as a risk mitigation strategy and bought back in August 2020 for $4. Add in all the high dividends over the years and the strategic Covid risk mitigation positioning and it must be nearly a 5 bagger...I might work it out one day. Not too shabby for just over 5 years and for a company I stated back then was only ever bought for its dividend yield lol

I think its a fabulous company but I wouldn't rule out being slightly biased and having some emotional attachment issues too lol

I think its dirt cheap (forward PE of just under 13 if they can match last years eps), considering they've proven to have broken through into Australian with a now well embedded 5 year track record of strong growth. So much potential remains untapped in that market that to be honest (and I never thought I would say this about HLG being such a classic dividend hounds stock), I'd be quite pleased to see them keep the dividend well below eps and ramp up the Australian store expansion.

I can't think of a better GARP stock ( https://www.investopedia.com/terms/g/garp.asp ) on the NZX but TRA and HGH are strong contenders.