SHARES

Dusk shares could be a sweet-smelling opportunity

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Dusk (ASX:DSK) is a retailer of candles and other home fragrance products. They design their own products and sell them through their own network of stores as well as online.

They are not sold through other stores or marketplaces. Candles are their biggest product however 66% of sales come from other products with diffusers and scented consumable refills rapidly catching up to candles.

Dusk underwent an IPO in November last year and has since almost doubled in price.

dusk shares dsk asx

There were four other retail stocks that also listed around the same time. One of them, youth fashion retailer Universal Store Holdings (ASX:UNI) has also doubled, but the other three are down by around 30%.

The pandemic has led to a trend where people are spending more money sprucing up their homes.

The question of course is what will happen after the pandemic subsides and people return to normal habits including international travel. The first point is that that day is probably still a while away and trying to predict it is a fool's game.

However, market analysts are forecasting sales to continue to grow, albeit at a much more subdued rate, reaching $220 million by 2024.

The driver of these returns has been strong sales which have resulted in four trading updates since listing, each revealing a further improvement in results. Revenue is now expected to exceed $150 million for 2021, a 50% increase on 2020, despite 20 stores in Melbourne being closed for almost three months.

CEO Peter King pointed out that the December 2020 quarter represented 15 quarters of like-for-like sales growth for Dusk, clearly demonstrating that the strength of the business is not due to the COVID factor alone.

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The March quarter 2021 also came in very strong with like for like sales growth of 44%. In the three years prior to the float, revenue had also been growing at 15% per annum. This would suggest that it is a strong business and may be able to resume a similar growth rate to pre-COVID but from a significantly higher base.

They are continuing to grow their store network, adding about 10 stores per year for a total of 118 at December 2020. Online sales have accelerated during the pandemic and now account for 8.3% of total sales.

It is not only revenue that has been growing. Most importantly, Dusk is profitable and those profits are growing at a strong rate. Profits increased by a factor of five over the last three years, and 2021 profits are expected to be about three times the level of 2020.

Dusk, like most retailers, receives cash at the point of sales, so these strong sales and profits translate directly into strong cash flow. At the end of December, they had cash of $35 million and no bank debt.

With this strong growth profile, it might be expected that the stock would trade at a high valuation, but when compared with forecast earnings, the PE ratio is only nine, which is very reasonable.

Of course, this reflects the rapid growth in earnings. If these earnings can be sustained, and two of the three market analysts who cover the stock think they can, then Dusk may represent a sweet-smelling opportunity.

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Chris is a senior investment analyst with Spotee Consulting. He is an experienced leader and investment expert having worked in financial markets for over 25 years. This includes co-founding a stock market research business and running it for seven years until it was sold. He is qualified as a Chartered Financial Analyst and holds a Graduate Diploma of Applied Finance and Investment and Bachelor of Commerce Degree. He has been a regular contributor to Money since 2012.
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