Jenny Ruth: Former basket case on a roll

COMMENT

The ranks of retailers on the stock exchange's main board will be enhanced on Monday by the entry of the mainland's big ticket retailer Smiths City Group.

The Christchurch-based company is graduating from the NZAX alternative market and, before that, it had been trading on the old unofficial market.

Many in the North Island will remember the company only as one of the post-1987 share market crash casualties.

It went into receivership in 1991 and the receivers sold its North Island stores.

Although it became the first publicly listed company to emerge from receivership in 1994 after a five-year scheme of arrangement was agreed to by its creditors, the company has stuck to its South Island roots since then.

These days, Smiths City looks nothing like a basket case.

Its latest bottom-line result was a 7.1 per cent rise in net profit to $4.3 million for the year to April 30.

That represented just over a 16 per cent return on opening shareholders' funds, the third year in a row the company has exceeded its directors' 15 per cent target (this was increased last year from 12.5 per cent), although that still disguises the underlying business performance.

This year's result includes a $258,000 dividend from the company's 21.5 per cent stake in Auckland property development company Wairau Park, down from the $645,000 dividend paid last year. Wairau Park's operations are winding up, its land now fully developed, with Smiths City due only about another $300,000.

Excluding Wairau Park, the company's pre-tax profits were up 19.8 per cent to $6.1 million for the latest year and have climbed steadily from $1.8 million in 1999.

Not surprisingly, its shares have followed suit, rising from below 30 cents three years ago to 78 cents yesterday, giving it a $41.3 million market capitalisation.

Chairman Craig Boyce noted in a presentation to the Institute of Financial Professionals last month that since the beginning of 2003 and late June this year, Smiths City shares outperformed the shares of all other listed retailers with a 33.3 per cent gain.

Its nearest rival was Hallenstein Glasson Holdings with a 15 per cent gain while its major competitors were all in negative territory over the period: Briscoe Group down 53.1 per cent, Pacific Retail Group down 24.9 per cent and The Warehouse Group down 41.5 per cent.

That outing seems to have further boosted the share price since the figures Boyce was using showed the shares rising from 45 cents on January 1, 2003, to 60 cents on June 26 this year.

At first glance, you might think the balance sheet a little stretched. At April 30, shareholders' equity of $31.7 million was supporting total assets of $151.2 million.

However, that reflects the fact that Smiths City also has a finance arm, lending on hire purchase to customers buying its goods and providing unsecured personal loans to trusted customers.

The finance book stood at $88.7 million at April 30 with about 95,500 active accounts.

The balance sheet shows the $25.2 million in finance company liabilities due within 12 months was amply covered by the $32 million in finance company receivables due in the same period.

The company also has a property arm which owns its flagship central Christchurch store, which, with 9000 sq m of ground floor retail space, accounts for between 20 per cent and 25 per cent of the company's sales. Its head office is also housed on the site.

Smiths City also owns a four-outlet wholesaler, Alectra, which provides everything from building products to appliances and furnishings to commercial customers.

But its major operations are the 17-store Smiths City chain, which sells big ticket items ranging from furniture and home appliances to carpets and sporting goods, on a full-service model, and its 10-store Powerstore chain which sells consumer electronics and other appliances from smaller-sized stores. About 80 per cent of the company's sales come from big ticket products.

Apart from the financial side of the picture, one of the impressive aspects of the company is its depth of management.

Chief executive Rick Hellings, who also owns 9 per cent of the company, has been there 12 years, 10 of them as a director, and two other directors have been on the board for 16 years. The company's fortunes are obviously dear to their hearts since Boyce owns 6.5 per cent while John Holdsworth owns 16.3 per cent.

Company secretary Gerry Willis has been with the company 12 years while general manager of the flagship Smiths City chain, Martin Simcock, has spent 21 years with the company.

"They've grown up through the company and have been through the bad times," Hellings said. "Some of these guys have yellow [the Smiths City corporate colour] blood flowing through their veins, I'm sure of it."

Hellings isn't by any means ruling out further growth in the South Island.

The company opened a Smiths City Furniture Concepts store last November aiming at the upper end of the market as opposed to the other stores' target market of those on low-to-middle incomes.

The company is in active negotiations for a second Furniture Concepts store in Christchurch.

But the firm has said it feels it now has the right number of stores in the South Island for its major chains and that further growth will come from enlarging existing stores and by expanding the range of goods its sells.

Hellings also has plans to further expand Alectra's business in the South Island.

He is open about the fact that the company feels ready to re-enter the North Island market. Certainly, last year's annual report noted that its major competitors have been expanding aggressively in the South Island in recent years.

"Were not looking at the North Island as a means of replacing any South Island business we may lose," Hellings said.

He believes Smiths City can more than hold its own in the South Island and any North Island venture will have to mean additional sales.

"We're not going to bet the business. We will do it store by store, town by town," Hellings said.

It was this model Noel Leeming used to build the chain of the same name (Hellings used to work for Leeming in the 1980s) and it's the same model other successful retailers such as Michael Hill International have used.

"It will be in bits that we can handle from a management point of view and that can be brought into our existing management structure," Hellings says.

He says it will be a matter of being patient and waiting for the right opportunities.