Jenny Ruth: Headlong rush to market listing

The overwhelming impression one gets from the prospectus for the $20 million Postie Plus float is of a collection of businesses undergoing helter-skelter change.

Take the Postie+ clothing chain itself, the foundation business described as relatively mature and providing systems and resources to the three other retail chains that make up the company.

Managing director Paul Young was brought into Postie+ in 1996 after owners the Dellaca family got themselves into trouble after buying the Warehouse Clothing Company, which swelled the number of stores to about 68.

Under Young's management, some of these stores were sold and others changed to Postie+, resulting in a 41-store chain.

That chain now comprises 59 stores, of which 40 have been either added, significantly refurbished or moved during his tenure.

And store change is not over yet. The company introduced a new format late last year and is progressively installing it.

While the business was suffering unspecified "significant losses" when Young arrived, it now has a solid five-year history of being in the black.

On the face of it, though, it's been downhill all the way since 2000, when the business posted a $2.03 million net profit.

By the year ended last February, net profit was down to $1.37 million.

Young says these results are distorted by one-offs and the impact of the New Zealand dollar falling abruptly to 39USc in 2001 (it is now about 59USc).

Postie+ gets most of its stock from Asia and rates its ability to buy direct from longstanding suppliers and to dictate sizing and design as one of its strengths. But that means the company is exposed to the exchange rate.

The prospectus explains that it does not usually hedge and this can put it at a competitive disadvantage. "However, it also creates opportunities and competitive advantages when the New Zealand dollar is strong and competitors have hedged at lower cross-rates," the prospectus says, describing the present situation.

Young says Postie+ decided to hold its pricing down in 2001 despite the currency fall, as part of a "grin-and-bear-it strategy". This was while it waited for competitors such as Deka, Hugh Wrights and Dress For Less - whom Young says were responsible for "bastardising clothing prices" - to go out of business.

"It was only a matter of time. You don't keep losing money."

Young estimates that Deka had not turned a profit in 20 years.

The results are distorted by the phasing out of the Postie+ mail-order business, which started in the 1980s and gave the chain its name.

They are also distorted by the fact that the business did not pay tax in 2000. The comparable pre-tax results show a rise from $2.03 million in 2000 to $2.15 million this year.

Young says the results were also affected by the process of preparing the acquisitions and personnel for the combined-company float.

Some executives required by the enlarged group were hired as long as 12 months ago, he says.

Indeed, Young has been planning a float for three years, having approached lead manager ABN Amro Craigs back then with a view to becoming one of the companies to list on the ill-fated New Capital Market.

(Young describes the New Capital system as "a joke".)

That latest result from Postie+ includes the results from the Baby City business, bought at the end of last October.

Postie Plus rates the seven-store Baby City chain as a prime growth prospect, with plenty of chopping and changing planned, based around a new-format store opened at Botany Downs last March.

Postie Plus' projected results for the year ending July next year include a $50,000 net loss from this chain.

Young says of such constant change, "That's retail," but adds that both the new-format Postie+ and Baby City stores have been tested and proven.

In the prospectus, chairman Peter van Rij says that "with few exceptions, each new Postie+ store has been profitable from day one".

The company rates the seven-store Rendells chain as its best growth prospect. It has a stable recent history, with its last new store opening in 1994 at Auckland's Downtown centre.

But Postie Plus, which bought the chain last May for $7.02 million, plans extensive changes, including a more modern image, new store formats and opening more shops both within Auckland and adjacent regions.

Rendells' recent results suggest that stability is not necessarily desirable. It also had an excellent year in 2000, posting a $5.47 million net profit for the 12 months to July 31, but plunged to just $1.03 million the next year.

Rendells picked up last year with a $1.44 million profit, but looks like it will not produce much this year. Its net profit for the nine months ended April 30 was just $489,000.

Young says he had been involved with the Rendells business for more than six months before the Postie Plus group bought it.

The group began sourcing products for Rendells before the purchase "so we could determine whether we could add value - businesses often feel they can add more than they actually can, but we tested some of those assumptions beforehand".

The fourth string to the company's bow is the 20-store Arbuckles manchester chain, which it will buy for $9.5 million from September 1 using the float proceeds.

One could view this acquisition as a bite too much for a company with so many action fronts on the go.

Young says he has been an Arbuckles director since 1999 and has seen it grow from a $7.87 million turnover then to $22.81 million for the year ended last March.

"You would have to say I've got a pretty good understanding of that business - I wrote the business plan," he says.

Arbuckles shows steady profit growth over the past five years, from a net $203,000 in the year ended March 1999 to $1.28 million in the year to last March.

Adding to a sense of confusing and constant flux, the parent company has changed its balance date from March 31 to February 28 to July 31. The three key chains in the group had different balance dates, making it hard to marry their historical records with the projected financial information.

The total results of the last full year from each of the businesses give a $4.09 million net profit on sales of $95.35 million.

Postie Plus is projecting a combined $4.35 million net profit on sales of $107.23 million for the year ending next July 31.

On the face of it, that is not too much of a stretch, although Rendells' profit decline this year may make it tough and you would also need to question the sustainability of Arbuckles' earnings - its net profit this year was double that of last year.

Young says the profit projections are conservative.

"We're not saying were going to do something that we haven't done before."

The projections are also based on a conservative store-opening programme that includes only those sites for which he has already signed leases.

"We don't want to be too bullish about some of the things we can achieve," he says, acknowledging that combining such a group is risky.

"I know how real those risks are and I know how to minimise most of those risks."