Stock Takes: Warm weather chills retailers' profit prospects

With New Zealand's economy expanding at its fastest pace in eight years, listed retailers could be expected to be riding high.

But above-average temperatures through autumn and early winter - combined with highly competitive trading conditions on both sides of the Tasman - are turning the year into a bit of a shocker for many companies.

The Warehouse Group, Pumpkin Patch and Kathmandu have issued profit warnings before their upcoming full-year results, wiping millions off their valuations.

The Warehouse and Kathmandu are blaming unseasonably warm weather, and childwear retailer Pumpkin Patch says high levels of promotional activity and tepid consumer demand are to blame for the up to 88 per cent drop in annual earnings - before reorganisation costs - it is predicting.

Hallenstein Glasson shares have shed almost 20 per cent this year after poor financial results, although the company reassured the market last week, saying trading between early February and June 22 had been marginally ahead of the same period a year earlier, despite the warm start to winter.

But things got so bad for fashion retailer Postie Plus that it went into voluntary administration last month.

The administrators have reached a conditional agreement to sell the business to an unnamed international retailer, reported to be South African investment group Pepkor.

Half a dozen Australian retailers, including Pacific Brands, Super Retail Group and The Reject Shop, have downgraded their earnings expectations over the past weeks.

A sluggish economic outlook and the "horror budget" Treasurer Joe Hockey delivered in May have put a big dent in Australian sentiment.

"Warm weather in autumn and early winter, combined with a major downturn in consumer confidence since the May federal budget, is leading retailers to heavily discount winter inventory," Morningstar analyst Tim Montague-Jones said in a research note. Hallenstein Glasson, Kathmandu and Pumpkin Patch also operate in Australia.

The Warehouse shares closed up 3c at $3.16 yesterday.

BOOK BUILD BLUES

Fund manager Brian Gaynor says he's "appalled" by the book build process being used to float glass supplier Metro Performance Glass.

The Milford Asset Management executive director says "a whole pile" of important information has been excluded from the draft prospectus, but because the words "strictly confidential" are highlighted at the top of every page he cannot reveal what is missing.

A book build is an auction-style process where brokers and institutional investors place bids on an offer in order to set the final pricing. As a prospectus cannot be issued until the offer price has been set, book build participants are often provided with draft copies known as "pathfinders".

Gaynor says the Metro Glass draft prospectus fails to give details of the financial strife the glass supplier got into several years ago, when ownership was transferred to its lenders after the company breached its financial covenants.

"This is as bad as I've seen it," he says. "A registered prospectus is a key legal document in capital raisings in New Zealand and when it is not available in full to people who have to make decisions on whether they are going to participate in an issue it is absolutely wrong as far as I'm concerned."

Metro Glass is being pitched in the book build with a $1.65 to $1.90 price range, which values the company at up to $352 million. The listing, expected to take place on the ASX and NZX, aims to raise between $237 million and $273 million.

A Metro Glass spokesman declined to comment on Gaynor's complaints.

The offer is being managed by Forsyth Barr, Macquarie Securities and UBS New Zealand.

PUSH AND SHOVE

Mixed signals are emerging from the Metro Glass book build.

Someone appears to have convinced the Australian Financial Review that demand for the IPO is strong and the final pricing is heading towards the upper end of the range.

However, local sources say there's strong "push back" to the offer on this side of the Tasman and the final price could come in at the lower end of the range.

The pricing is expected to be announced with the prospectus next week.

Despite his concerns about the book build, Gaynor says the Metro Glass IPO will probably get away.

"I'm not saying there is anything wrong with the company - it's just the [book build] process."

Equipment rental firm Hirepool withdrew its IPO plans last week after investors balked at the price and Gaynor says enthusiasm for new listings is beginning to wane slightly.

"The edge has been taken off the excitement over the IPOs."

TOUGH CUSTOMERS

Consumer confidence is stronger in New Zealand than Australia, but Kiwis are still difficult customers.

Stock Takes paid a visit to Onehunga's Dress-Smart last weekend, an outlet shopping centre that provides a pretty good illustration of the challenges facing local apparel retailers.

The mall was bursting at the seams, with bargain-hungry customers queuing up for the toilets, fighting for parking spaces and jostling for the best positions to pick over cut-price clothing.

We have become a nation of discount hunters unwilling - for the most part - to shell out on the more fully priced items that bolster retailers' profit margins.

Then there's the ever-present online challenge, with the strong kiwi dollar, as well as the opportunity to avoid GST on many purchases making overseas websites particularly attractive.

BUCKING THE TREND

Briscoe Group - the operator of Briscoes, Rebel Sport and Living & Giving stores - hasn't issued a profit warning this year and managing director Rod Duke says investors can rest assured that one isn't on the way.

"I can confidently predict there will not be a profit downgrade issued and I'm looking with some real excitement about telling you about our first-half result," he says.

In March the company, majority owned by Duke, posted a more than 10 per cent rise in full-year net profit to a record $33.6 million. Announcing a 5.74 per cent rise in first quarter sales in May, the firm said its gross margin percentage had tracked higher in the first three months of the financial year, despite "continued competitiveness" across the retail industry.

Briscoe shares have gained more than 10 per cent this year.

Duke says the company benefits from having "special trading arrangements" with suppliers, meaning that in some cases unsold seasonal stock - such as heaters - can be returned or exchanged rather than heavily discounted or held over.

However, he says the company hasn't been completely unaffected by the challenging trading conditions facing the retail industry.

Briscoe's sales, while they were "very, very good", had been expected to be even better, Duke says.