Take a casual look over Flight Centre (FLT) and you just might conclude that Australia’s largest listed travel operator is a sitting duck for internet-based travel rivals. With approximately 2,480 shops worldwide, Flight Centre has a big network to maintain.
An old story
We’ve all heard the stories: consumers visiting bricks-and-mortar stores, inspecting products, trying on clothes and getting free advice, before buying through an online retailer at lower prices. If they’re not careful, many traditional retailers may end up as free showrooms for their online rivals.
Source: Yahoo
As more consumers buy goods online, a large retail chain with physical outlets looks like a capital-intensive liability, rather than a money-spinning asset.
Against the tide of capital-light internet competition, bidding for their share of the total transaction value (TTV) pie, the same has the potential to happen in the travel industry. The traditional travel agency model – give free advice and take bookings later through a commission-based payment structure – looks outdated and vulnerable in comparison to the accessibility of internet-based travel services, like Bookings.com, Webjet Limited and Wotif.com.
The opportunity
But to dismiss Flight Centre as a traditional travel retailer, is to underestimate its presence in online travel, growing offshore footprint and outstanding long-term potential. Flight Centre has become one of Australia’s great companies, even though it is rarely mentioned in the ranks of conventional blue chips.
Perhaps therein lays the opportunity. For if an observer was to take more than a casual look beneath the surface, what they would find might surprise. Flight Centre is a significant retailing innovator and not one to be left behind in the wake of newer internet-based upstarts.
Indeed, its physical presence on the ground has driven its success and created what it has become today – a blended shopfront and online retailing behemoth, and a template that other companies are watching closely and for some, trying to follow.
And why wouldn’t they try? With a one-year total shareholder return of 48.3%, a three-year average annual return of 33.7%, and 66.5% annually and over five years, few businesses can claim such impressive returns.
These returns are backed up by annual earnings per share (EPS) growth of 28%, from 2009 to 2013, and the current forecast is for the growth to continue at 10% per annum until 2016. Remember, a business that can compound its earnings at 10% will be 33% larger than it is today in just three years’ time.
A trailblazer
With an entrenched store footprint and well-recognised brand, imitating Flight Centre’s success overnight will be a hard act to follow. FLT now has an on-the-ground presence in 10 countries (Canada, USA, South Africa, United Kingdom, Dubai, India, Singapore, Greater China, Australia and New Zealand).
Importantly, all countries are now generating positive EBIT returns after years of investment, again highlighting the success of this franchise and the strength and scalability of its operations globally. This will add to the cash flow streaming through the door and will continue to strengthen an already fortress-like balance sheet. It will also provide the financial flexibility to continue expanding, both organically and by acquisition.
Few businesses can claim such an achievement and while many have tried, fewer still have managed to export their business models overseas. Flight Centre has done it, and done it well.
While Australia still makes up the lion’s share of the earnings, FLT’s growth overseas continues and all but India, in the 2012/2013 financial year, recorded positive business momentum. This reflects management’s focus on continuing to expand its global sales network with a targeted 8-10% annual increase in shop numbers, giving further confidence that earnings in future years will march steadily upwards.
As we all know, share prices follow earnings, and all of this has not been lost on those willing to dig a little deeper. After such stellar share price gains over the past few years, and more modest levels of growth estimated in the future, value in
Flight Centre has somewhat diminished at current market prices.
The shares are currently not cheap, but nor are they expensive. We would rate them as being fairly priced on our expectation that it will be a much bigger figure in a few years’ time.
When compared to other online shopfront glamour stocks trading on stratospheric market valuations compared to their earnings profiles – such as Domino’s Pizza – fair, in this context, seems more than reasonable.
Even so, patient investors might watch and wait for better value, if it ever emerges. Trying to second-guess the share price, however, is a fool’s game, and, as you know, I make no claim to have any idea where a share price is going in the short term. Either way, given its quality and performance, Flight Centre deserves a pole position on both portfolio watchlists and your portfolio alike.
And while others may point to the emerging threat of online competition, Flight Centre looks superbly positioned to own the middle ground between bricks-and-mortar on one side and the internet through a blended model, creating a formidable barrier to entry for rivals. It’s a repeatable model that is scaleable overseas and delivers excellent returns. So even with a lower currency, please continue to travel.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
