Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Retail success at home attracting investors

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Photo / APN

Some listed retailers have performed remarkably well in a difficult economic environment.

This environment includes intense competition, rising property costs, the Christchurch earthquakes, competition from internet retailers and cautious consumers.

Seven NZX listed retailers have made profit announcements covering the important Christmas period, Briscoe Group, Hallenstein Glasson and Michael Hill producing particularly good results.

Kathmandu, which has a large presence in Australia, had a disappointing result in line with many Australian retailers. David Jones and Myer, the two large department chains across the Tasman, both reported net earnings declines of nearly 20 per cent.

Woolworths, which has been one of the more consistent-performing Australian retailers, announced a 17 per cent profit drop mainly because of a disappointing result from its Dick Smith operations.

Briscoe is led by managing director and 78 per cent shareholder Rod Duke. Duke is the doyen of New Zealand retailing, as he understands the needs and spending habits of domestic consumers and this is reflected in his company's results.

Briscoe, which has no overseas operations, reported net earnings of $27.5 million for the year to January 29, and $17.2 million for the second six-month period.

The second-half figure is a 16.1 per cent increase over adjusted net earnings for the same six months a year earlier.

Duke said the strong profit growth reflected "constant focus on inventory management, cost control (and) promotional planning".

At the end of the period, the company had cash balances of $95.3 million and no debt.

The final dividend, which was raised from 6c to 6.5c, required only $13.9 million of these huge cash reserves when it was paid this week.

Duke said he expected the retailing environment to remain difficult and volatile but was pleased with the company's start to its new financial year.

Hallenstein Glasson announced a 26.5 per cent rise in its interim profit this week, from $7.1 million to $9.0 million. It also declared a 14.5c interim dividend compared with 14c a year ago.

The company has no debt, $22.2 million of cash and the interim dividend will require $8.6 million.

Chief executive Graeme Popplewell said the company had a record Christmas and a strong January.

Sales increased across the Tasman but "there is still some way to go in Australia before we can return to a level of profitability acceptable to the board".

Popplewell said that the first eight weeks of the new season showed strong sales growth of 7 per cent, but the company expected it would be difficult to maintain this momentum for the rest of the financial year.

He was particularly critical of shopping centre owners and their "embedded practice of annual rent increases".

Kathmandu's result - a drop in interim earnings from $10.5 million to $6 million - was worse than expected although the dividend was maintained at 3c a share.

The company has $87.8 million of debt, only $2.2 million of cash and the interim dividend required $6 million.

The result demonstrates that retailers can be severely penalised if they don't have excellent marketing as well as strong inventory and cost control management.

The company performed poorly in Australia, particularly in states that are not benefiting from the mining boom.

Chief executive Peter Halkett said same-store sales were ahead of the first half since January 31 but because of the difficult market conditions, "we do not believe it is possible to provide specific guidance".

"We are actively managing our operating costs and are well prepared for our Easter and winter sales events."

Michael Hill International, which has 52 stores in New Zealand and 193 in Australia, Canada and the United States, reported net earnings of $26.3 million for the six months to December 31, up from $23.6 million for the same period a year earlier.

Its interim dividend has been increased from 1.5c to 2c. The jeweller has $43.3 million in debt, $32.5 million in cash and the interim dividend required $7.7 million.

The company achieved improved results in New Zealand, Canada and the United States.

Australia reported a 2.4 per cent reduction in its operating surplus.

Michael Hill achieves higher margins in New Zealand than elsewhere, which is consistent with most other retailers that operate in the domestic and overseas markets.

Postie Plus, the smallest company in this group, reported a loss of $775,000 for its first six months compared with a deficit of $749,000 for the same period last year.

The company usually has a profitable second half and pays only a final dividend. It has $8.5 million of debt and $700,000 in cash.

Chairman Richard Punter said: "The significance of a strong winter season to our annual result is well understood, and management and staff will be striving to extract the higher volume and value of sales on which a second half profit is based.

"I can report that the group overall has made a good early start to the new season."

Jan Cameron, former owner of Kathmandu, owns 19.3 per cent of Postie Plus.

Pumpkin Patch reported an accounting loss of $30 million for the six months to January 31. But when discontinued activities and reorganisation costs are excluded, the company had net earnings of $7.2 million compared with $8.6 million for the first half of its 2010/11 year.

It is not paying a dividend as the group has debts of $70 million and only $3.3 million in cash.

Pumpkin Patch is closing its United States and United Kingdom retail operations and newly-appointed chief executive Neil Cowie said that as far as its continuing operations were concerned "gross margins were impacted by increased promotional activity and higher production costs, mostly cotton".

The children's clothing retailer expects Australia to remain challenging and no material improvement is expected in New Zealand in the short term.

It will also be affected by the high New Zealand dollar but borrowings are expected to decrease to $50 million by year end.

It is also forecasting reduced costs because of improved procurement processes, lower cotton prices and higher average import foreign exchange rates.

Cameron owns 9.6 per cent of Pumpkin Patch and Duke 9.4 per cent.

The Warehouse, which also has a new chief executive, reported adjusted net earnings of $46.7 million for the six months ended January 29 compared with $53.0 million for the same period last year.

The interim dividend has been cut from 15.5c to 13.5c. The company had borrowings of $217.7 million and cash of $19.3 million before the $42 million interim dividend payment.

Chief executive Mark Powell said: "The positive same store sales trend continuing into February has been encouraging. Margins have held in all major categories other than apparel.

"However, the resultant growth in gross profit dollars has not been sufficient to combat inflationary and strategic cost increases, causing the decline in adjusted earnings".

The Warehouse, which is the only retailer to give specific guidance, is forecasting adjusted net earnings between $62 million and $66 million for this year compared with $76 million last year.

This is a rather cautious outlook but domestic listed retailers continue to attract investor interest because several companies, particularly Briscoe, Hallenstein Glasson and Michael Hill, are performing well in an extremely difficult and competitive environment.

Disclosure of interests; Brian Gaynor is an executive director of Milford Asset Management which holds shares in all the companies named, except Kathmandu and Postie Plus, on behalf of clients.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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