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Briscoe Group managing director, Rod Duke

Thursday 22nd September 2005

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Retailer Briscoe Group reported a 51.1% rise in net profit to $10.2 million for the six months ended July, although the previous first half result was particularly weak. Briscoe has now reported two successive quarters in same-store sales growth following six consecutive quarters of same-store sales declines. The company has yet to achieve one of its November 2001 float objectives of adding a third chain to its Briscoes and Rebel Sports chains, negotiations to take over the Stirling Sports chain having collapsed in June.

Sharechat: Why was second quarter sales growth a Rebel Sports so much slower than in the first quarter and why was Briscoes' second quarter so much better than the first?

Managing direct Rod Duke: In any one year, quarters fluctuate and depend largely on a number of internal and external factors. We lookat half on half rather than day on day, week on week or quarter on quarter. You get a representative period on which you can base some sensible projections. It's more appropriate for us to look at things on a half yearly basis. (With Briscoes), we were experimenting with the way in which we put together our customer communications, that is our advertising, colour catalogues and television. We experimented to the point where we cut the number of products in half. It went from 129 products typically in a catalogue down to 63. They looked more stylish. They looked better, but the cruel reality was that we sold significantly less on that particular catalogue. We made changes towards the end of the second quarter. We're nearly back to where we were (in product numbers). Our results are a lot better. We're trying to make the products in our catalogues look more like the products in our stores. They're great products and good quality brand names. The items are much more accessorised. It's not just the product If we've got a food mixer we put food in it. If it's glassware, you might put flowers in the vase or wine in the glass.

SC: Are you going to be able to deliver same store sales growth through the rest of the year?


RD: I think we've got a history now of being able to show some growth, not just in same store sales but also in overall sales and also in gross margin. Profitability is perhaps the key to the share price. We're cautiously optimistic. We can see no reason going forward why we ought not perform in the future as we've done in the last two or three quarters.

SC: Can you detect any impact on sales of rising petrol prices?

RD: We haven't been able to detect it so far. What I can tell you, in the past the two common indicators to customer resistance to purchase have been housing interest rates and the price of petroleum. Generally, when those two move up, it has a tendency to slow retail businesses. When they stabilise or slide down, they're generally positive.

SC: Could those factors cause consumers to switch from big ticket merchandise to the sort of goods Briscoes sells?

RD: We've certainly seenin most recent times the Plasma screen, digital camera and photo phone business (take off). We don't participate in any of those but we've certainly seen those sales take the imagination of customers. Perhaps it's our turn now. People are returning to the more commodity end of the market rather than the luxury end.

SC: How have you gone about better controlling stock levels?

RD: What we've been doing is just going and tracking where our sales are coming from. That's by item and by store. Identifying what our off take of merchandise has been. In other words, what quantity customers are actually purchasing and making sure a) we have that stock in store at all times and secondly, not having excess stock in those stores. Basically, what we're doing, we have what we call "draining the pipe line" so the pipe line isn't absolutely full but just at the right level to accommodate the sales off take. As a consequence of that, we've been able to reduce the average store's stock holding by 10% to 12%.

SC: Why did inventory levels increase in the first half and what happened to average stock levels per store?

RD: Stock by store was down 10% to 12% in the first half. After I saw the release published, it probably would have been a little clearer had we said to shareholders the average closing stock per store had been down (rather than just that inventory increased $2.14 million to $48.37 million after the opening of five new stores last financial year.)

SC: How is acceptance of the higher quality brands you've introduced going?

RD: It's been fantastic. It's been absolutely sensational. We've got a number of brands that have been in the stores for a very, very short period of time. The reaction's just been brilliant.

SC: Can you explain what were the sticking points with Stirling Sports?

RD: Not enough franchisees agreed to sign a new franchise agreement. Some of them didn't ... we didn't go to each of those that chose not to sign and say what bits of it you don't like. We did a full presentation to all of them and went through all the items line by line by line. A number of them came across but not a big enough number came across for us to be satisfied it was a worthwhile move for us to take. It was crystal clear to everybody what we required to be a participant in that transaction.

SC: Have you identified any other potential acquisitions?

RD: Yes - more than one.

SC: Are you likely to announce any within the next 12 months?

RD: We're certainly hopeful. There were two very, very clear things that we said we wanted to do (when the company floated). The first one was that we wanted to reformat all the stores, which we did with the Briscoes stores. There were nearly 30 of them at the time (34 stores now). At the same time, we wanted to open a number of Rebel Sports stores and get them running. Thirdly, we wanted to prepare the company to buy or start up a complementary business. We've looked at a number of opportunities. We haven't got one that we thought was valuable enough to us to spend good money on. Quite frankly, some of the stuff we've looked at, I'm very happy now that we didn't go forward with it.

SC: Is a start up a better option:

RD: Certainly, in terms of a Rebel Sports smaller format vs Stirling Sports. A start up of a smaller format is clearly for us a better option. We're ready to open a number of stores. We will have something to tell the market very, very shortly.

SC: How are negotiations on the Super 14 sponsorship going?

RD: I have a heads of agreement in front of me and we expect the complete paper work to be done in the next very short period.

SC: So you're confident it's going ahead?

RD: Yes. From the documentation and the talks we've had, both the NZRFU and Rebel Sports are eager to continue the association. It's been good. If you're a participant in a sports and leisure business, as Rebel Sports clearly is, and you like to participate in a meaningful way in a sporting endeavour in this country, from all the research we've done, it's really rugby first and nothing I can think of is a close second. In terms of ownership and TV rights, but also excitement, the Super 12 has just been fabulous for New Zealand.

SC: What are the main growth opportunities for Briscoes?

RD: A continuing upgrading of the ranges and assortments that we have in Briscoes and for Rebel Sports. It's a continuing addressing of a number of regions throughout New Zealand that we're not in with the smaller format stores. The only place where we need to put a big box is New Plymouth. It's one of the few remaining centres where we're not represented. There are many, many smaller regions where we're not represented. We've just got to get distribution in those regions.


SC: What are Briscoes' main strengths?

RD: Briscoes' main strengths are its capacity to deliver good quality product to the customer at value prices because of our overhead structure. That's the key differential factor that this company has over other general merchandise companies.

SC: What are Briscoes' main weaknesses?

RD: I don't know. I guess somebody else is going to answer that. It would be nice to get a comment from shareholders or sharechat people. Too much money in the bank, I suppose. I've got no gearing at all and $50 million in the bank. (He agrees that's not particularly desirable.) Still, if you can't find a good home for it, it's best to leave it in your back pocket.

SC: Is it simply that you're not prepared to pay a fair price for an acquisition, that you want to be able to get everything on the cheap?

RD: Do I love a bargain? Yes, I love a bargain. At the end of the day, if it's earnings per share accretive, it makes good financial sense and it's a good fit, then we want to be there. We're not hanging around looking for something to steal.

SC: Why did Briscoe Group struggle during a period of high growth and high New Zealand dollar?

RD: It was part of the first and second quarters (last year) when we changed our strategy. Briscoes will continue to be in the business of changing the ranges, changing the format, improving the service levels, doing all those clever little things that retailers have to do to differentiate themselves from other retailers. We made too bold a move, a move too far, and too quickly. We pulled back from that vast change that we had looked to undertake. We're continually moving the ranges. They look better in the store. We're looking to buy better and improve our prices.

SC: Is there anything else you'd like to say?

RD: Shareholders should be aware that we're still looking to acquire. We're still looking to establish another business, but we're very, very conscious that it's got to make good sense for us to do it. We're not in the business of wasting money just for the sake of doing something.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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