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Retailers face selling pressures

By Peter V O'Brien

Friday 10th September 2004

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Substantial variations in the share price performances of individual retailers over the past six and 12 months were another reminder of the lack of commonality among the sector's units.

A comparison of share prices for 10 listed retailers is in the table.

Jeweller Michael Hill International, general retailer Smiths City Group and children's clothing specialist Pumpkin Patch had massive share price growth, the latter two companies since their respective listings in November and June.

Pumpkin Patch was among the most successful initial listings of recent years. The price got another boost in July when the company announced a profit upgrade from $4.04 million to the range of $7.5-8.0 million for the year ended July 31.

Michael Hill International's price jumped on the back of an excellent result for the year ended June.

Net profit rose 47% to $15.06 million from the previous year's $10.24 million, the latter figure excluding a one-off gain of $1.33 million from the sale of the Australian head office building.

Smiths City's share price was strong in recent weeks. It began the year at 56¢, fell to 44¢ where it wandered around for several months, and then took off to hit a 2004 high of 80¢.

Clothing retailer Hallenstein Glasson Holdings enjoyed a sizeable share price movement in the past six months after dipping 6.7% between September last year and April.

Recent retail sales statistics and profit forecasts suggested that companies with interim or final balance dates after June 30 (most of the 10 in the table) would report higher earnings in the coming weeks.

That would please investors who enjoyed the share price gains. It would do nothing to affect the fact that history is less of a guide to profitability in retailing than in other industries.

Listed retailers include three clothing specialists in Hallenstein, Postie Plus and Pumpkin Patch.

Kirkcaldie & Stains has significant apparel sales at its sole store on Wellington's Lambton Quay.

There is no guarantee that any clothing retailer will repeat the sales experience of one six months' period in the next.

Misjudging fashion trends is one factor that could affect sales but a minor one compared with the weather.

Companies selling clothing refer to "good" and "poor" winter and summer turnover, the two terms having reverse meanings to those the rest of us intend when we talk about the winter.

Relatively warm, dry weather in winter mean poor sales for clothing retailers while wet, cold conditions result in good turnover. Summer sales plummet when the weather is equally poor and rise in warm and dry conditions.

No clothing retailer can predict seasonal sales in advance. Revenue, profit and resulting share prices can consequently be volatile to the extent of erratic.

Non-clothing retailers face different pressures on or aids to profitability.

Homeware and sportswear retailer Briscoe Group has a continuing, solid replacement market in homeware, with likely spurts as housing ebbs and flows.

The company's main problem recently seemed to be heavy discounting, which affected margins, the running-flat-out to stand still phenomenon.

Retailers face a slowdown in sales growth. The Institute of Economic Research forecast last week that retail sales would be good until the year ended March 2006, when they were expected to rise only 3%.

That figure could be too high if the Reserve Bank decided the recent surge in economic activity, including retail sales, required a solid lift in interest rates to reduce inflation below the bank's target range.

That action would affect the retailers within New Zealand but Michael Hill, Hallenstein, Pacific Retail Group and The Warehouse Group have overseas interests.

Michael Hill got 64.5% of total revenue from Australian sales in the year ended June and 2.2% from Canada.

Australia provided 65.3% of the company's $27.8 million operating profit, before unallocated expenses of $12.74 million.

An economic slowdown in New Zealand, normal or enforced, would affect the company but rapid growth in Australia and in Canada (where the group has yet to earn a profit) could offset a local downturn.

Hallenstein Glasson's Australian activities accounted for only 8.7% of total sales in the six month ended February 1 this year and 10.1% in the corresponding period of the previous year.

There were operating losses from Australia in each half-year but company comments in February indicated things were improving.

The Warehouse found Australia a drag on earnings, as did other companies before it, and considerable effort is needed to put Australian operations on a basis similar to New Zealand.

Pacific Retail disposed of New Zealand retails companies, relying now on UK appliance business for any claim to be a retailer.

Restaurant Brands is involved in fast food, which isolated it from the other nine companies.

Any investment attraction would be based on reorganisation designed to improve profitability.

Retailing has investment merit for people prepared to punt on weather where it influences sales, on recovery where appropriate and on proven planned growth in situations like Michael Hill.

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