Hallenstein-Glasson was formed in 1985 through the merger of the Hallensteins men's clothing stores (founded in 1873) and Glassons, a women's fast-fashion retailer founded in the early 1900s. These days, it operates 36 Glassons stores and 42 Hallensteins stores in New Zealand, with a steady expansion into Australia since 1998, where it now has 32 Glassons stores and four Hallensteins stores in Queensland.
Like many New Zealand retailers before it, Hallensteins did not find a ready welcome for its retail format in Australia. Initially, the chain launched both brands into Melbourne, choosing to close down its Hallensteins format during 2003. It took until 2017 for the brand to be relaunched in Queensland.
That may sound like ancient history, but it highlights how Hallenstein-Glasson has built a track record of adaptability in its operations to respond to market conditions and a management focus on those activities that have the best chance of success.
Those attributes of adaptability and focus could be helpful as Covid-19 wreaks havoc with retailers in Australia and New Zealand. Just how helpful was revealed on September 25, as Hallenstein-Glasson unveiled its 2020 annual result, covering the 12 months to August 1.
There's been plenty for the company to contend with in the second half of the financial year, with impacts also extending into the 2021 financial year.
There were the initial lockdowns and associated loss of foot traffic in Australia and New Zealand. From July, a lockdown in Victoria, Australia, closed a further 11 (Glassons) stores — these are still closed today, with a planned re-opening late this month.
After the balance date, a further lockdown was announced in Auckland, affecting 25 stores.
As it was for so many other companies, it wasn't a great ending to 2020; more significantly, it hasn't been a great start for the 2021 financial year either.
Or that's what you might think. The company said — as part of what little outlook it could provide — that total sales were up over 10 per cent since August compared with the same period in 2019.
That statement, coupled with yet another good result for the 2020 financial year, propelled Hallenstein-Glasson shares to rise 22 per cent on the day of the announcement (from $4.55 to $5.55).
Like most retailers, the company still has challenges to overcome in relation to maintaining sales levels in the face of the significant risk of falling consumer demand over the coming year. Nonetheless, Hallenstein-Glasson appears to be in a position to approach the challenge from a very stable base.
First, and despite Covid-19, the company maintained its sales versus the previous year, at around $287.7m. That masks a 9 per cent decline within the Hallensteins brand (to $88m), offset by an 8 per cent rise in Glassons' Australian revenue (to $96.7m) — but such is the beauty of a diversified brand portfolio.
The Hallensteins performance is concerning. At the half-year interim report, sales were tracking well, so the brand appears to have suffered more as a result of Covid-19 impacts than Glassons.
The company has put this down to a decrease in sales of more "formal" wear as people increasingly worked from home during the period.
Both brands are investing heavily to increase online sales, with the company noting an 80 per cent increase in online revenue in the second half of the year as consumers responded to Covid lockdowns.
Second, the company has no long-term debt, other than the long-term lease commitments for its stores. That's a great place to start in the event of a recession — but critically, it may provide the company with headroom to take advantage of any industry shakeout, particularly in the highly-competitive and crowded Australian women's fast fashion market, where Glassons has a more limited market presence than many of its competitors.
Such an approach might not suit the culture of the company, however. This columnist cannot remember when Hallenstein-Glasson EVER had debt, although others with longer memories than my own may be able to let me know.
Third, underlying profitability and free cashflow remain strong. While net profit after tax declined by 4.3 per cent to $27.8m as compared with the previous financial year, this has more to do with the change in accounting standards required by the introduction of IFRS-16 than any significant operational change. Free cashflow improved strongly compared with a year earlier as the company took steps to reduce capital, extend payment terms and cut costs in response to Covid-19, like many other companies.
It's worth noting that the company received about $10m in wage subsidies from the Australian and New Zealand governments, which has no doubt supported underlying profitability in 2020 by reducing its wage bill from $51.7m to $45m in 2020.
The company has continued to pay dividends, with the final dividend for the 2020 year announced for payment in mid-December. That creates an interesting ethical conundrum for many shareholders and leaves the company vulnerable to criticism from social or political commentators.
For investors, that also creates a risk of increased wage costs during 2021. On the basis of expected growth, however, the removal of the subsidy should be well-covered by future gross margin.
Some weakness in gross margin was apparent throughout 2020. This is unlikely to be solely Covid-related, as it was already apparent in the half-year interim accounts (to Feb 1, 2020). Hallenstein-Glasson cites foreign exchange impacts and Covid-related freight costs in the second half as key factors, but investors will be looking closely at the next set of accounts.
Margins may yet fall further, depending on the extent to which consumer demand is maintained as the economy weans itself off government support packages in the coming months.
Tortoise vs hare
Hallensteins has taken a seemingly patient approach to growth in Australia, opening an average of one store a year since 2003. Despite this, since 2016-17 it has experienced a surge in Australian sales — at a compound growth rate of about 24 per cent per annum.
This can be compared with Kathmandu, which first entered the Australian market in the late 1980s and grew quickly to nearly 90 stores in 20 years. Kathmandu's share price 10 years ago was around $1.28 (it's around the same now), while Hallenstein's was around $4.39 ($5.49 as of September 30).
Of course, both have paid a steady stream of dividends since, and Kathmandu has raised additional capital in between those dates. Both companies have suffered their fair share of market crises along the way (changes in demand, brand repositioning, store investment and so on), so both can be said to be "adaptable" to market conditions.
The analogy is like the children's story, where the tortoise beats the hare in a race by staying focused and maintaining steady perseverance.
It's Hallenstein Glasson's unwavering focus on profitable, steady growth that makes the most difference for investors in the current uncertain world.
- Oliver Mander is not an authorised financial adviser (AFA) and nothing in this column should be construed as financial advice. Seek out the advice of an AFA to support your investment decision-making.