Jenny Ruth: Rebel with a cause

As they say, one swallow doesn't make a summer and the market is clearly in wait-and-see mode with homeware and sporting goods retailer Briscoe Group, despite its better-than-expected first-quarter sales figures.

This month, for the first time in six quarters, the company was able to report same-store sales growth, rather than declines, for the Briscoes and Rebel Sport chains.

Before anyone gets too excited about the 5.76 per cent rise in same-store sales for the three months ended April and the 10.83 per cent rise in total sales (reflecting stores opened since April 2004), the first-quarter figures last year were particularly weak. Same-store sales were down 8.9 per cent from the first quarter of 2003 and overall sales were down 1.9 per cent, although three new Rebel Sport and two more Briscoes stores opened in the intervening year.

Last year's second-quarter, same-store sales were down 8.86 per cent, third-quarter sales fell 2.67 per cent and fourth-quarter sales were down 6.23 per cent. In the previous year, fourth-quarter, same-store sales were down 3.05 per cent.

In other words, the company is now reporting from a much lower base. Nevertheless, the latest quarter's sales were 8.7 per cent higher than for the first quarter of 2003.

At least one analyst now rates the stock a buy, although that more reflects the extent to which the market has trashed the shares and the resulting strong dividend yield. After peaking at $2.80 in early 2003, they sank as low as $1.10 last December. While there was a brief flurry upwards after the latest sales figures were released, they quickly fell back to about $1.20.

The sales figures aren't the only positive signs. Although the company's latest annual net profit fell 20.7 per cent to $18.7 million, its gross profit margin has been increasing every year for five years, from 30.9 per cent of sales in 2001 to 33.4 per cent in the latest year.

While the company provided no numbers for the latest quarter, it said "gross profit margin, in terms of percentage and dollar contribution, is satisfactorily ahead of that generated for the first quarter of last year".

What's been dragging down the net results has been the cost of opening new stores - seven last year and six this year.

Stock control has improved. At the end of January, despite the new stores, inventory was down nearly $3 million to $47.35 million.

Managing director Rod Duke concedes the company may have been too aggressive with its new-store openings in the past few years. He said they coincided with a quiet summer followed by a poor winter and a slowdown in sales of general merchandise.

"On reflection, it would have been better to delay the opening of those stores, but the complication is that when you're a renter, good sites come up very seldom."

Fewer new stores will be opened this year, with only two or possibly three scheduled.

Duke says the Briscoes chain, with 33 stores and two more opening this year, is reaching maturity.

"At best, we could probably find another five around the nation."

Rather than increasing store numbers, the focus for the next two to four years will be on extracting greater returns from the existing stores.

At last year's annual meeting, the company unveiled a big shift in strategy. It had decided its aggressive discounting was devaluing its brands, especially Rebel Sport.

"The high profile and constant discounting was compounded by our decision not to renew Christian Cullen's advertising contract, replacing him with low-cost, uninspiring advertising which further cheapened shopper perception of Rebel Sport," Duke told the meeting.

Instead, the company would try to move the brands more upmarket and have fewer but bigger sales. Rebel Sport also took on sponsorship of the Super 12 rugby series to improve its image.

This change in strategy is why sales fell but gross profit margins improved.

Analysts hope the first-quarter sales figures may be the first indication that the strategy is working. Jeremy Simpson, an analyst at Forsyth Barr, noted the positives in the figures, but "we want to see more consistent same-store sales performance before upgrading our investment view"- that investors hold off buying.

Another consideration stopping most analysts getting too enthusiastic about the stock is the prospect of a slowing economy and the likely impact on retail sales.

Arthur Lim, at Macquarie Equities, thinks Briscoe's problems, like those of discount chain The Warehouse Group, are more a reflection of a fundamental change in the retailing environment.

"Initially, Briscoes and The Warehouse were almost like a rolling pin across the country," Lim says.

But now we're starting to see not only second-tier players but fourth and fifth-tier players following similar deep discounting strategies and threatening the established stores by adopting similar practices of sourcing products cheaply in Asia.

These competitors are also adopting smarter marketing strategies: instead of offering 20 per cent off, they will say that if customers buy one item, they can have 50 per cent off the next item. Instead of selling one product at 20 per cent discount, they're effectively selling two at 25 per cent off.

The Warehouse is obviously still suffering, with same-store sales at its "Red Sheds" down 2.5 per cent in its latest quarter.

In any case, Lim says Briscoe has some hard work before it regains credibility.

"Briscoe is now perceived by the market as a company that's over-promised too often and under-delivered. The challenge now is to not only meet but to exceed market expectations."

Another reason to remain sceptical is its failure to acquire other retail brands. Raising funds for such a purchase was a major reason for the $40 million float in late 2001.

The company has been negotiating to buy the Stirling Sports franchise out of receivership since November but the sale still isn't unconditional.

Duke says a major reason for the delay is that the receivers changed their advisers midway through the negotiations. But now the deal is close to becoming final.

One comfort for investors is that Duke has the most at stake in this company, owning 74.5 per cent.

And he hasn't been shy about increasing his stake either, buying 500,000 shares for $655,000, or $1.31 each, in December when some fellow executives were selling.

What, who, where

Briscoe Group HQ: 36 Taylors Rd, Morningside, Auckland.

Management: Managing director Rod Duke, deputy managing director Alaister Wall.

Profile: Briscoe Group operates the 20-store Rebel Sport and the 33-store Briscoes Homeware chains.

Results: The company reported a 10.8 per cent rise in first-quarter sales and a 5.76 per cent increase in same-store sales. That was the first time in six consecutive quarters that the company has been able to report positive sales growth.

Market capitalisation: $254.6 million.

Major shareholders: Rod Duke with 74.5 per cent.