Reasons to buy GXL shares now

3 reasons why I think the Greencross Limited share price is a buy

Tristan Harrison | June 2, 2017 | More on: GXL NVL WOW

The Greencross Limited (ASX: GXL) share price has fallen by over 20% over the last two months.
Greencross is the largest pet business in Australia and New Zealand with 169 veterinary clinics and 240 retail stores.
Here are three reasons why I think Greencross looks like a good buy to me:
Co-location strategy
Greencross has a large number of veterinary clinics and retail stores. Management have come up with a great strategy of co-locating a vet inside many of its Petbarn stores.
This strategy is great at cross-selling each business and creates brand loyalty for both, particularly with Greencross’ new customer points system.
It is costing a bit of capital to set up, but it’s actually a lot cheaper than acquiring independent vet clinics. Greencross estimates that it costs more than $1.2 million to buy a clinic and between $0.5 million to $0.7 million to set one up inside a Petbarn. The economics are clearly in favour of co-locating.
Defensive earnings
Greencross has quite defensive earnings in my opinion. Pets are an integral part of our family now and we would do almost whatever it takes to look after them if they had to go to the vet.
Pet insurance is becoming more prevalent, which is a good idea for pet owners and vets alike. It makes the owner more likely to say yes to an expensive operation if a lot of the cost has been taken care of.
Not like other retail businesses
Petbarn and Cityfarmers are not like most retailers in the retail industry. Pet owners will always need to give their pet the basics such as food, cat litter and other items like that.
This makes Petbarn more like a pet version of a supermarket like Woolworths Limited (ASX: WOW) in my view as it has got similar defensive qualities. You could also look at vets as pet private hospitals.
Risks
There are two main risks to Greencross in my opinion.
The first is that National Veterinary Care Ltd (ASX: NVL) will be challenging Greencross on the veterinary national stage in a few years. However, I think there is enough market for both to succeed.
The other risk is internet retailing. The internet-only retailers can almost always create a cheaper operating model to offer cheaper prices. Greencross will have to work hard to grow its online sales and use its size & economies of scale to create cheaper prices for customers.
Time to buy?
Greencross is currently trading at 13x FY18’s estimated earnings with a grossed-up dividend yield of 4.8%.
I think this price presents a good opportunity to buy some Greencross shares, whilst there is generally negative sentiment about the whole retail sector.