by Jenny Ruth
Wednesday 11th July 2007 1 Comment
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The company had been without a managing director since the formal departure of predecessor Richard Holden in August 2005, although Holden had effectively been out of action from May 2005. The company reported $747,000 net profit for the six months ended February 28 compared with just $286,000 in the previous first half. For the year ended August 31, 2006, the company's net profit was down 52.6% at $574,000 from $1.2 million the previous year, although that was better than had been expected at the time Milford joined the company.
Sharechat: Why did the company's performance change so dramatically after your predecessor's departure?
Managing director John Milford: I started nearly 12 months after Richard Holden left the business. It wasn't a year, but it was a fair period of time (that the company had been without a managing director). There were two areas that impacted on the retail business. The sales didn't meet budget both for the year before and particularly for the Christmas period. When I joined the company it had to do a major clearance of inventory. There were some issues with the inventory but it related to the period before as well. They had a poor trading period over Christmas - any retail business starts with sales.
SC: You seem to have been able to turn things around remarkably quickly. What was the single most effective thing you've done?
JM: Since I joined the company, my focus has been on what the customer needs. I couldn't say to you we've done one single thing, apart from the big clean up of the inventory. That did have a significant impact because it uncluttered the system. We got the inventory back into line and that allowed us to put new season's merchandise in. That was probably the most significant thing we did. Apart from that there's been a whole range of smaller actions that have all focused on the customer.
SC: You're introducing new IT systems - what is the state of the current IT arrangements? Is it correct that there isn't a computerised inventory management system?
JM: That's right. We don't have a point-of-sale system that's linked to a merchandising inventory system. We do it all manually which in today's environment, you're quite right to think, blimey, how do you operate that. I'm starting to show my age. When I started in retail it was all done manually. Being a single site, not a multi-site business, makes it easier to operate that way. Once we put in a new point-of-sale system linked to a merchandising inventory system it will make it so much easier.
SC: How important is stock control in the up-market space?
JM: From my perspective, there are four key parts that you have to keep your finger on when running a retail business. One is sales, another is managing people, expense control and stock control is the fourth. At any point in time, the importance will run between those four. Stock control is critical to running a retail business, stock and cash management.
SC: Was the company too opposed to discounting?
JM: I agree that if you have merchandise that's not selling, you have to take the appropriate action. If the appropriate action is reducing that stock and getting it out of your system, that's what you have to do. That's what we did when I joined the company with the big sale. I think it's fair to say that inventory shouldn't have built up to the level it did. The answer to your question is, probably yes, but we've built this brand on offering good value without discounting. I wouldn't see us as going down the route of being a regular discounting business because we couldn't compete with the national retailers doing that. We operate in a different niche.
SC: How much does the state of the economy impact on an up-market department store like Kirks? Shouldn't it be relatively immune?
JM: We probably have a broader base of customers than people appreciate when you consider the very large customer base we have at Kirks. A number of categories are impacted by what I would call a lack of customer confidence. Different socio-economic groups of people will be impacted in different ways by high interest rates. Discretionary spending can be affected when fuel goes up in price. I don't think that any socio-economic group, apart from the very, very top, is immune.
SC: Is it sensible to pay dividends without imputation credits?
JM: This was a decision that was debated by the board. What we felt was we didn't have sufficient imputation credits to pay a dividend with them. We felt that as we hadn't paid a dividend in the previous period at all, we should pay a dividend, even without imputation credits. We just felt that was important to our investors.
SC: Although the share price has improved a lot, when Harbour City alone has a market value of $39.9 million and the company's current market capitalisation is only $32 million, what is the market saying about the company? (Immediately before buying Harbour City for $29 million in 2002, the company's market capitalisation was $25 million)
JM: Kirks does have a lack of liquidity in its shares. There's very little moving in volumes. People don't tend to sell large blocks of our shares. When you read the question as it's framed, you could come to the conclusion that, at the current share price, the shares are good value.
SC: Wouldn't the lack of liquidity mean that anybody wanting a reasonable stake would have to bid the price up?
JM: That's the problem when you have a lack of liquidity. There's not that many to get hold of. The share price has gone up quite a lot in the last few months. I'm not so sure that people totally appreciate the value of the building in the books. It is strategically, and from a value point of view, a very good investment.
SC: Can Kirks return to earning $2 million-plus in net profit as it was before the Harbour City purchase?
JM: Obviously, the purchase of the Harbour centre has impacted on profits because we have to fund it, we've got to service the $15 million debt. Having said that, I don't think that number is out of reach of where we should be.
SC: What needs to be done to achieve that?
JM: Retail businesses need continuous investment. Whether its on infrastructure, such as in the point-of-sale system we already mentioned, or the retail offer, it needs to be continually reinvested in. We've started this year with a number of initiatives as far as enhancing the retail offer. We need to continue to do that. With department stores it's a bit like painting the Auckland harbour bridge: you start at one end and go to the other and then you start again. It's a bit like that. We need to make sure our offering appeals to customers.
SC: The lease over your main store will be coming up for renewal - will the company be exercising its option to renew?
JM: The main building where Kirks is has got lease renewals in December 2008 and in 2011. We have a right of renewal for 21 years. I can't answer you from a commercial sensitivity point of view what we will be doing. What I am saying is that the lease doesn't mean that we're out of here in 2008 or 2011. In a matter of months we will be paying market rental.
SC: What percentage of Harbour City does Kirks currently occupy?
JM: There are two parts to Harbour City. There's the retail footprint on the ground and mezzanine floors. We have been increasing our footprint on the retail ground floor. We're probably occupying about 50% of the retail footprint on the ground floor. Of the total building, because we've been increasing our retail presence, we now occupy about 25%.
SC: Is it planned that Kirks will take over the entire Harbour City Centre?
JM: The cuisine and housewares businesses are the areas we have over there. The answer to that question is that if space was available and it was commercially viable to do it, yes, we would expand the business. But it's got to be commercially viable.
SC: Has any thought been given to expanding Kirks beyond Wellington? (ie Lower or Upper Hutt, Masterton or further afield)
JM: Yes, it has been discussed. My observation is that it's very expensive from an infrastructure point of view to set up businesses in new locations - the fitout, inventory, people. I would envisage us leveraging other means of getting our sales to customers before we actually expand in bricks and mortar. I think there's an opportunity for Kirks to leverage catalogue, telephone and internet shopping before I would see an opportunity in bricks and mortar. I've been absolutely overwhelmed by the support that Wellington customers give to Kirks. Kirks is a Wellington icon - a bit like Ballantynes is an icon in Christchurch. I'm not so sure how much of an icon it is out of Wellington. I wouldn't want to put that at risk.
SC: Does Kirks do anything in that virtual space at the moment?
JM: Very limited. Obviously, before we look at an internet offer, we need to have a point-of-sale and inventory system. We certainly do have a number of customers who will shop with us over the telephone. I suppose the next step is a limited catalogue offer. Then once the IT systems are in place, we can look at an internet shopping option.
SC: Do your shareholders still tend to be customers and rather elderly?
JM: I think it's fair to say we do have a number of shareholders who are mature, but the market research that we did last year suggests that over 60% of our customers are under 50. Whilst we have a portion of our shareholders who are more mature, we have a customer profile that's younger.
SC: The fact that your options can't be exercised before 2010 suggests you're planning on staying a while. You've worked for much bigger operations in the past. What attracted you to the job?
JM: There's more than one answer to that. I was delighted when the board offered the share options to me. That's always a vote of confidence that the board decided to offer it. Obviously, to benefit from it, I have to be here to the year 2010. That's a normal business practice to put those retention packages in place. To answer your question about bigger jobs, yes, I have run larger retail businesses with multiple stores. The reasons I took this role included some personal and family considerations. Being in Wellington facilitated those. This is a small, large business or a large, small business - it depends on how you want to view it. This is still a great challenge, even though it's not a larger business. It's fulfilling me as far as job satisfaction goes at this point in time. The fact that we've been able to get some excellent results in such a short period of time is, in part, that you can get your arms around it. You can make things happen quicker in a single location business.
SC: Do you expect to stay in New Zealand for good?
JM: As far as I'm aware, yes. Let's put it this way: I would never go back to the Northern Hemisphere. We came to New Zealand for family reasons as well as business reasons. I have sons in school and they have a fantastic lifestyle in New Zealand. I can't envisage the situation where we would go back to the Northern Hemisphere. You never know, but if I had the choice, I wouldn't.
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