Exposed firms a bit under the weather

SALE: Kathmandu’s winter sale may determine its full-year performance.
SALE: Kathmandu’s winter sale may determine its full-year performance.

Listed clothing retailers closed out their financial years fighting market headwinds brought on by a drop in consumer spending and a late winter season.

During the past month, Pumpkin Patch and Hallenstein Glasson have both issued profit warnings to shareholders, cautioning of a drop in full-year profits.

Those two and retail chain Postie Plus have all suffered blows to their share prices variously from a retail downturn, especially in Australia, and poor distribution management.

Milford Asset Management investment analyst Victoria Harris said she did not expect a strong pickup in consumer spending any time soon.

Last week, Pumpkin Patch said a recent increase in the level of promotional activity in Australia, and early end-of-season sales, would affect earnings for the international side of the business by $600,000.

As a consequence, the full-year profit after tax, but before reorganisation costs, was now expected to be between $7.5 million and $9m, compared with $10.1m last year.

The company was a top performer on the NZX last year, with a 32 per cent gain in its share price between July and October. It started out the year with a share price of $1.48. Pumpkin Patch shares were trading as low as 75c last week.

The late arrival of winter would have a lingering effect on apparel retailers as they were now carrying higher levels of inventory, Harris said.

This led to retailers starting their end-of-season sales earlier and discounting more aggressively than usual to maintain market share, she said.

"This aggressive behaviour usually comes at a cost to margins and, in turn, the bottom line."

Pumpkin Patch was in the final stages of implementing strategic changes, including a new brand director, Harris said. Improvements were also being made in stock control.

"This gives the company more flexibility around controlling inventory volumes."

The organisational improvements being made by Pumpkin Patch were encouraging, Harris said. However, it remained to be seen whether these measures would pull the company out of the rough patch it was going through.

Last month, Hallenstein Glasson also said the late start to winter meant the company would not meet its sales expectations for the season and was bracing itself for a drop in full-year profit. Hallenstein said it expected full-year net profit after tax to be in the range of $18.5m to $19.5m, a decrease of about 10 per cent on the previous year.

For the four months from February to May, sales were down 1.6 per cent on the same time last year.

Hallenstein Glasson's share price has fared slightly better than Pumpkin Patch's. It was sitting at around $4.90, after dropping as low as $4.60 at the end of June, down from highs of $5.85 in April.

Forsyth Barr retail analysts said Hallenstein's earnings downgrade was driven by Glassons in New Zealand and Australia, where it made 20 per cent of its sales.

"[Hallenstein Glasson's] continued investment in expansion would help build critical mass for Glassons, but we have yet to see evidence of longer-term success in the Australian market."

The New Zealand retail market also remained difficult for apparel retailers, with consumers still price conscious, analysts said.

Target, the large discount apparel retailer in Australia, also announced it expected earnings to be 35 per cent lower than the previous year, for the same reasons, Harris said. Future share price performance for the companies would largely depend on trading conditions across the Tasman, she said.

Coriolis Research director and retail analyst Tim Morris said a drop in Australian sales was not a surprise. Australian retail spending had been retracting for some time.

"The ‘lucky country' avoided the global financial crisis, they sidestepped the whole thing, and five years later it's catching up with them," Morris said.

The Australian economy does not look set to regain momentum any time soon. The Australian dollar sank to a near three-year low against the greenback last week as the market continued to price in an eventual slowdown in stimulus from the United States Federal Reserve and weak Australian retail sales.

Retail sales rose 0.1 per cent in May from a month earlier, compared with a 0.3 per cent rise expected by economists. Sales for April were revised from a rise of 0.2 per cent to a fall of 0.1 per cent. Sales also fell in March.

Weak profit results for Postie Plus had less to do with a downturn in the Australian economy, and more to do with the failure of a new distribution system.

A new distributor was charged with getting garments into Postie Plus's network of 83 stores nationwide. But the stock did not arrive on time.

By the time Postie Plus got its stock on to the shelves, it had to begin discounting, destroying its margins and leaving the company worth just $6.6m as measured by market capitalisation.

Third quarter sales results for Postie Plus showed a sales decrease from continuing operations of 14 per cent in the period to $19.4m.

Year-to-date sales for the period dropped 5.4 per cent to $62.7m while gross margin percentage also dropped.

Postie Plus said it was implementing profit improvement opportunities by focusing on sourcing and supply, marketing and job cuts.

The company's share price is trading at about 16.5c, down from 22c at the start of the year.

Postie Plus had a very volatile share price, and any movement in the market would assist that, Harris said. It was fighting the same economic issues as Pumpkin Patch and Hallenstein Glasson, she said.

"Postie has a lower socio-economic target market, so any squeeze in the economy would be felt by the company."

Kathmandu, which also has a July 31 year end, was currently in its most important sales period, Harris said. This annual winter sale would account for 30 per cent of the year's sales, she said.

"The delayed, and cold, arrival of winter may turn out to be a blessing for this retailer."

The leisure-clothing retailer had not issued a profit downgrade like Pumpkin Patch and Hallenstein Glasson, so it could be tracking towards good full-year results, Harris said.

Kathmandu's share price was sitting around $2.50, after trading around $3 in May.

Sunday Star Times