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Opinion: Summer blows hot and cold for retailers

By Adam Bennett of NZPA

Friday 18th March 2005

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Much like the summer just gone, trading in the retail sector blew hot and cold over the last few months.

Three of the country's largest listed retailers reported results this week. And while The Warehouse and Briscoe Group continued to sing the blues, Hallenstein Glasson - for many years a solid performer - had a sizzling summer for the second year running.

The Warehouse on Monday reported a reduced first half profit of $53.88 million, down 2.9% on the same period a year ago, and homeware and sporting goods retailer Briscoe Group yesterday reported a 21% drop in annual net profit to $18.7 million.

Both had earlier issued warnings that their pre-Christmas sales volumes had been dampened by the summer's wet start, sending their shares to fresh lows.

The Warehouse slumped to $3.50 after its January 19 warning while Briscoe dipped to $1.05 a few days after its announcement on December 17.

The Warehouse said its Red Sheds general merchandise chain had "a disappointing performance in seasonal categories such as apparel, sporting goods, toys and gardening". The Red Sheds' operating surplus for the six months was down 12.3% at $90.1m. Profit at its Blue Shed stationery business was down 96% at $200,000.

Briscoe also blamed poor November and December sales for its 21% drop in January year net profit to $18.7 million, but its bottom line was also hit by costs from opening new stores.

Briscoe was trading at $1.23 in afternoon trade today while The Warehouse was at $4.01, little changed from their opening prices this week.

Clothing retailer Hallenstein Glasson however, reported a record half year result of $8.47 million - up 21% on the same period a year earlier. Last year's first half result was up on the year before by a similar factor.

Its shares at $4.12 this afternoon were also little changed from the start of the week but have climbed 47% in the last year.

Hallenstein too said it had seen sales slowed by unseasonable cold weather. "But our stock offering was right in line with our customers' fashion expectations," managing director Cliff Kinraid said.

Hallenstein Glasson's ability to prevent sales getting too soggy was a credit to its management, Forsyth Barr analyst Jeremy Simpson said.

"They read their market very well."

"It just goes to show if you are a well run company then the environment has actually been pretty good."

New Zealand Retailers' Association chief executive John Albertson said overall 2004 retail sales had grown by just under 8%.

Although official data shows a 0.2% fall in December retail sales excluding petrol and other motor vehicle-related goods, they rebounded in January, rising 1.1%.

Albertson said while summer got off to a slow start - particularly for seasonal lines - the weather picked up in January, "and trade returned to some degree of normality".

"The level of promotional activity increased because there was a far shorter season to make good.

"What we've seen is an extremely competitive period of time where my pick would be that margins have been squeezed pretty hard."

Briscoe managing director Rod Duke said yesterday that after the poor pre-Christmas period, the warmer weather had helped the group dispose of its summer stock.

He said competition was intense but a strategy employed early last year - dropping the number of sales and depth of discounting - had started to pay off in the fourth quarter.

"It has been working like a dream since Christmas."

The Warehouse is also changing strategy. In November it announced plans for the Red Sheds to slash stock levels by a third, tidy up stores and shift focus from products to customers.

On Monday chief executive Ian Morrice - appointed last August - fleshed out the group's plans which include simplifying its management structure, stripping out supply chain costs, stocking more fashionable products, developing house brands and trialing new store layouts.

The Warehouse wants to remain competitive on price while improving the experience for customers - making its stores less like... well, warehouses.

That will increase costs, but it's the company's suppliers who look likely to be squeezed. Morrice said The Warehouse planned slash the number of firms supplying its stores. Last month it was also reported the company had asked some suppliers for a 10% discount.

Meanwhile a bright spot in The Warehouse result and a bonus for Hallenstein Glasson was the encouraging results from their operations in Australia where both companies have previously had a torrid time.

The Warehouse said its Australian Yellow Sheds posted an operating surplus of $5.3m, an $18.3m improvement on the previous period.

Morrice said the group was "delighted with the beginning of the turnaround" in Australia. But the Yellow Sheds are not expected to report a full year surplus until next financial year.

Hallenstein chairman Warren Bell said "excellent progress" in Australia which saw its operations there post a profit of $114,000 for the period, up from a $396,000 loss a year earlier was a "standout feature" in the group's result and "a significant milestone in our development as a trans-Tasman retailer".

Hallenstein's and The Warehouse's Australian performance is especially credible against the backdrop of a 1.0% fall in Australian retail trade during the December quarter.

Back in New Zealand, the retail outlook remains relatively favourable.

The economy continues to steam ahead, despite a string of Reserve Bank interest rate hikes including one this month. The bank has indicated there may be at least another one to come.

But with a tight labour market and pressure from unions likely to see wages rise and the government's Working for Families scheme coming into effect soon, consumers look likely to stay cashed up.

Looking forward, Briscoe's Duke was encouraged by early signs of a recovery in sales growth in February and March.

He said the company expected to perform "significantly better" in the current financial year than it had in the year to January.

Assuming the Yellow Sheds continued to improve, The Warehouse expects to report net earnings 8 to 16% ahead of last year.

And Hallenstein's good result meant "people are probably going to be upgrading their earnings", Forsyth Barr's Simpson said.

The Retailers Association's Albertson said there were a number of positive factors that would keep retail sales up.

"Maybe not to quite the height it achieved last year...but we are still expecting growth across the market on a year-on-year comparison of somewhere around 6 to 6.5%.

"Our pick is that the market will soften a little bit but it certainly won't be slash the wrists time."

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