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Retailers will come again

By Peter V O'Brien

Friday 21st March 2003

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The share price performance of listed retailers in the past six months was a significant reversal of the gains made between March and September 2002.

Comparable percentage movements for the preceding six months were: Hallenstein Glasson, -3.5%; Kirkcaldie & Stains, 15%; Michael Hill International 11.4%; and Pacific Retail 61.9% (before a 21:100 bonus issue made at the end of September).

Several factors caused a turnaround, some specific to particular companies, given the diverse interests of organisations included in the generic classification of retailers.

Retail jeweller Michael Hill International, for example, said the strengthening of the New Zealand dollar from 81Ac (a six-month average rate) accounted for $NZ494, 000 of its $779,000 operating fall, after exclusion of an after-tax $1.1 million gain from the sale of the Australian head office building.

The New Zealand dollar traded at 92.4Ac on Wednesday. A continuation of that trend would see Michael Hill with more currency translation erosion in the year to June.

The company incurred startup costs in its Canadian venture but they could be reversed in future, assuming the current three stores (plus a fourth opening in April) became profitable within the next 12 months.

Michael Hill's comments about the Canadian operation were ambiguous at the best and puzzling at the worst. The report said: "It is still very much early days in the life of the Canadian operation and it is expected that it will be a full 12 months before we get a complete understanding of the Canadian jewellery scene."

Any New Zealand company expanding experiences a practical "on-the-ground" learning period, irrespective of its pre-operational research. Opening four stores in a few months and saying it would take 12 months to get a "complete understanding' of the scene was strange, in the absence of further elucidation.

Pacific Retail should benefit from the rising New Zealand dollar, depending on how much of the gain local manufacturers and importers (including Pacific) pass on to the retailers.

"Big ticket" items manufactured locally have a high level of imported components, from metals to plastics. Products imported in fully builtup condition benefit from a strong currency.

Big-ticket retailers may have to adjust for an apparent slowdown in demand after an earlier period when they did well from the replacement market and requirements of a buoyant new housing sector. Those areas seem to be plateauing, although any decline in new housing will take time to work through to retailers, given the time needed to clear current workloads.

Apparel retailer Hallenstein Glasson cited weak sales in its Glassons womenswear stores in December, with consequent pressure on margins to keep stock at realistic-levels, as one reason for static profit in the six months ended February.

At the January sales fast food and coffee retailer Restaurant Brands operates in the most fiercely competitive sector of retailing, with the possible exception of supermarkets. Any slight downturn in sales revenue and/or margin reductions are reflected in the share price, beyond general market trends.

A similar comment applies to the market's treatment of discount retailer The Warehouse Group.

Retail companies operating on fine margins must put up with the views of "analysts" who have not had the responsibility of running a real business. Retailers will come again, despite the current downturn in their share prices and, to a lesser extent, profitability.

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