Smiths City Group will write down several unprofitable stores by $4.8 million as the rebranded Auckland stores struggle to gain traction with an unfamiliar clientele, pushing the retailer into the red for the current financial year.
The Christchurch-based company expects to report a net loss of between $7 million and $8 million in the year ending April 30, compared to a profit of $2.4 million a year earlier, it said in a statement. Revenue is seen falling to between $209 million and $213 million from $227.4 million a year earlier.
"Although we saw some improvements in February and March, this soft demand has led to heavy discounting, often to unsustainable levels, and the expansion of interest-free credit terms to periods rarely seen in the industry," chief executive Roy Campbell said. "These trends were most pronounced in Christchurch, where we operate our largest outlets and generate a significant proportion of our total sales."
Retailers operating 'bricks-and-mortar' stores have struggled to compete with online rivals operating with lower overhead costs at a time when consumers are demanding cheaper deals.
Smiths City broke even in the first half as tough trading conditions and the cost of rebranding three Funiture City stores in Auckland and Whangarei weighed on earnings, noting the squeeze on margins at the time. While the bulk of the company's revenue is through its retail network, the majority of its margin is in its finance arm.
The retailer today said rebranding those stores and closing the Ngauranga Gorge outlet in Wellington "weighed heavily" on annual earnings, and that the former Furniture City outlets weren't meeting expectations.
"Although we are making strong sales of appliances – a category previously not available in the former Furniture City stores – furniture sales are yet to recover to levels prior to the rebrand," Campbell said. "This reflects a regional customer base that is still familiarising itself with the Smiths City brand as well as the broader market challenges."
Smiths City expects those stores to remain unprofitable through their current lease periods, prompting the impairment charges.
"Smiths City is determined to invest and grow in markets that offer the strongest opportunities, including Auckland and the upper North Island, and to continue to lift the performance of the existing network through improving the execution of the Smiths City 'live better' brand strategy," Campbell said.
The shares last traded at 54 cents and have dropped 10 percent so far this year.