Dusk Group Ltd - A More Favourable Comparable Period in Sight
Dusk Group Ltd
A more favourable comparable period in sight
Dusk Group Ltd (ASX:DSK) is Australia’s market leading omni-channel retailer of home fragrance products with an estimated 24% market share. The group is vertically integrated with products developed in-house and sold under the Dusk brand via the ~132 store portfolio and on-line network. Products include candles, diffusers and essential oils. ‘Gift giving’ periods are key for sales and earnings with the FY22 EBIT skew 80%/20% towards the first half (Christmas). The group operates a paid loyalty programme with its ~755k members accounting for 62% of revenues, providing a cost- effective marketing channel and higher average spend relative to non- members. Dusk listed in November 2020 in what was essentially a $35m shareholder sell-down of 56% of the company or 35m shares at $2.00/share. The group showed its growth intentions by announcing the acquisition of Eroma in December 2021 pending due diligence for $28m, but this acquisition was abandoned in March 2022 as certain conditions were not met. Pro-forma FY22 sales declined 7% and EBIT 31% as the group lost ~24% of its trading days in H1 FY22 due to mandated lockdowns and cycled particularly strong comps in H2 FY22. The group will now cycle lockdowns over H1 FY23 but navigate a likely more cautious consumer due to rising interest rates and cost of living. Near-term multiples for both DSK and peers reflect this caution.
Business model
DSK operates a vertically integrated, omni channel retail model with products designed in- house and distributed under the Dusk brand through the group’s store and on-line networks. The group’s gross margin of ~68% is reflective of this vertical integration. Customer marketing is aided by the 755k paying loyalty programme members who on average spend more than non-members. Dusk rewards’ average transaction value (ATV) increased 4.0% to $60 in FY22. Growth avenues include further store openings, growing the on-line presence (8.3% of total sales currently), product innovation and potentially international expansion.
FY22 a tale of two halves
While like-for-like sales declines were similar across both H1 FY22 and H2 FY22 at -10%, the drivers were completely different. H1 FY22 was impacted by mandated store closures which reduced trading days by 24% over the half, and trading over the key Christmas period was affected by Omicron concerns. H2 FY22 was impacted by the cycling of particularly strong comparable sales. With the group about to cycle mandated lockdowns in H1 FY23, a true reflection of trading conditions in a rising interest rate/cost of living environment is unlikely until H2 FY23. Prior to Covid, DSK averaged 9.6% like-for-like store growth between Q1 FY18 and Q3 FY20, highlighting sustained customer loyalty.
Comparables are vertically integrated specialty retailers
There are not many pure vertically integrated omni-channel retailers listed on the ASX but two that come to mind are furniture and homewares retailer Adairs (ASX:ADH) and lighting specialist Beacon Lighting (ASX:BLX). Both are homewares retailers while ADH also operates a paid loyalty programme. Like DSK, the forward PER multiples for these retailers is well below 10x with investors cautious around discretionary trading.
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- Dusk Group Ltd - A More Favourable Comparable Period in Sight09 Sep 2022