Feltex 'failed to see looming changes'

Troubled carpet maker Feltex astonished retailers in Australia, its biggest market, by issuing a prospectus forecasting strong growth just as they were tightening their belts for a sales slump.

Herald on Sunday enquiries across the Tasman suggest that as Feltex prepared for an IPO in May 2004 it was not only out of touch with its market, but also had a rocky relationship with two of Australia's three biggest carpet retailers.

One retailer, Carpet Choice, claims Feltex has missed out on $60 million of sales through its stores in the past three years because it would not mend broken bridges.

The iconic New Zealand carpet manufacturer's bankers have given it until the end of September to find a rescuer and lift its earnings to cover debt and avoid collapse, after it breached its banking convenants last month. Analysts estimate the company needs an injection of $20 million to $60 million.

Feltex shares were trading at around 23c late last week. Two years ago, many Mum and Dad investors bought the shares for $1.70. They are the only ones left in the company after a string of shock performance announcements.

Feltex makes 75 per cent of its sales across the Tasman, where Carpet Choice and Carpet Court are the two biggest retail chains.

Carpet Court (Northern) general manager Brian King, responsible for New South Wales and Queensland stores, says he could not understand how Feltex's prospectus could claim profits would double to $23.9 million for the 2005 financial year.

"Most carpet retailers appreciated the boom was over and we were heading for tougher times. Feltex were estimating their profit was going to increase by almost 100 per cent when we were forecasting our market was going to come off the boil by at least 10 per cent." About 30 per cent of Carpet Court's carpet business is in Feltex products. After two hefty post-listing profit downgrades, Feltex in August last year posted a bottom-line profit of $11.8 million - less than half that promised in the IPO.

Carpet Choice chief executive Paul Amos said Australia's biggest carpet market, NSW, where 40 per cent of sales are made, had softened noticeably in 2004 as soaring Sydney real estate prices ate up consumers' disposable dollars.

Amos said Feltex and Carpet Choice have "a history".

Only 5 per cent of carpets it handles are Feltex products. Amos suggested the problem was with former Feltex CEO Sam Magill, who quit in August last year after nearly 40 years in the Australian industry. He said the rift lasted 10 years and dated back to when Magill was running the Australian operations of carpet manufacturer Shaw Industries, which Feltex took over in 2000.

Amos believed the historical dispute has cost Feltex at least $200 million in lost sales. He said new Feltex CEO, Melbourne-based Peter Thomas, was trying to patch things up, but meanwhile Carpet Choice has built strong allegiances with other carpet makers.

Australia's third biggest retail player, Carpet Call, also suggested a difficult relationship with Feltex until last year's management shakeout.

Managing director Jim Smith said the relationship had "improved enormously" in the past 10 or so months.

"They have made some positive attempts to fix things. It's a matter of personalities sometimes. There's been a dramatic improvement in their attitude to customers."

Feltex's Thomas "didn't have time to talk" to the Herald on Sunday, according to his spokesman.

The anticipated downturn in Austalia's housing market was factored into Feltex's view of 2005 market conditions, the spokesman said. "What wasn't was the sharp downturn in the renovations market - nobody expected that."