Petbarn owner Greencross has said it expects fiscal 18 earnings to be either in line or slightly below the prior year after its veterinary division failed to deliver an anticipated improvement in performance in the third quarter.

The business also expects to book between $16 million and $20 million in mostly non-cash impairments in its full year figures, following an operational review that has foreshadowed a broader change in strategy under recently appointed chief executive Simon Hickey.

In a trading update on Wednesday Greencross said underlying earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be between $97-$100 million, compared to the $100 million achieved in FY17.

The business previously said it agreed with market forecasts of a $110 million result.

The vet division is expected to impact second-half earnings by $2.7 million after failing to achieve a previously budgeted second-half uplift due to weakness in standalone clinics partially offsetting strength in other parts of the business unit.

Retail trading appears to have gained momentum though, with Australian LFL sales up 4.3 per cent for 42 weeks of FY18 trading, up from 3.7 per cent by week 32. New Zealand LFL sales were up 4.2 per cent.

There will also be a $4 million impact to FY18 underlying earnings associated with labour related to a strategic review of IT projects, which have led the Board to discontinue some initiatives.

These appear to include projects relating to Greencross’ store of the future project, which has been cancelled, and the company’s point-of-sale system.

Shares in Greencross sank in the hours after the announcement, down 20.6 per cent to $4.26

Strategic changes

Hickey announced an immediate review of the company’s operating cost base on Wednesday amid the strategic refocusing, saying that Greencross will increasingly prioritise optimizing its existing footprint at a lower capital cost.

“Given structural changes in the pet sector, we need to review our previous capital-intensive model of renewing the physical layout of stores and clinic and instead focus on customer centricity and profitability of the existing fleet,” Hickey said on Wednesday.

“We will continue to back fill veterinary and other services into retail stores in strong catchments and to grow our footprint where we identify synergies within our existing network. However, going forward our immediate focus will shift more towards integrating technology into our existing offering.”

Under the renewed strategy several areas of the business have been targeted for improvement, including a renewed focus on cross selling retail and service offers, more personalised marketing, optimising store and clicnic formats, enhancing the Group’s loyalty program, improving customer data use, expanding private label and delivering labour efficiencies.

The cost review will target $10 – 13 million in savings and be completed by 1 July in a bid to reset Greencross’ cost base by streamlining existing management structures.

Headcount reductions are expected to generate $1-2 million in redundancy payment costs to be booked in full-year statutory earnings.

There will be an $8 – 9 million impairment booked on the carrying value of various projects relating to retail point of sale systems, supply chain and retail software as part of the strategic shift.

A $4 – 5 million inventory non-cash impairment, including recently recalled cat food, will also be booked alongside $3 – 4 million in further impairments for a number of small investments and a few loss making stores.

Hickey said the changes will position the business for a return to earnings growth in FY19.

“I am confident that, following this review, Greencross remains well placed to successfully execute our integrated petcare strategy, selectively invest in growth opportunities and deliver improved profitability for our shareholders,” he said.

Hickey has already moved to improve the performance of Greencross’ vet division, particularly standalone clinics, by increasing digital marketing and entering into new partnerships with police associations, among other measures.

More to come.