Jenny Ruth: Chastised Postie Plus ‘on the way up

Postie Plus Group's shares have taken a thrashing, which is hardly surprising considering the fall in profitability in its latest first half.

Even before the company started warning of a poor result from its first-quarter sales report last November, the market had taken a distinctly unloving attitude towards the stock.

After floating in August 2003 at $1.25 a share, the stock has consistently traded below that level, bumping along round the dollar mark for most of last year before its latest collapse to 75c.

With its market capitalisation now at $28.8 million, that means the market thinks the company is worth $21.2 million less than when it floated.

The float allowed the owners of the Postie Plus clothing chain to further expand. Before the float in October 2002, it had already acquired the Babycity chain and it paid $7.02 million in May 2003 for the Auckland-based Rendells specialty department store chain, then seven stores. The float proceeds allowed it to buy the 20-store Arbuckles manchester chain for $9.5 million.

At the time, I said the Arbuckles purchase looked like a bite too much for a company with so many other areas needing work, particularly on Rendells, whose profitability had been declining since 2000.

I also questioned the sustainability of Arbuckles' earnings since its net profit in the year ended March 2003 was double the previous year's results.

Unfortunately, my comments proved prophetic.

Managing director Paul Young, whom the prospectus credits with bringing the Postie Plus chain back from unspecified "significant losses" since he took over the top job in 1996, now agrees it was "a pretty adventurous project" to meld those chains into a single company.

"It would be fair to say that any acquisition becomes a lot more difficult than people anticipate. Often, the benefits flow through in year two and three and you're sometimes overly optimistic," Young says.

With its first profit report a month after the shares started trading, the company managed to better its prospectus forecasts with a $1.24 million net profit against the $950,000 forecast for the five months ended July. But it would have been scandalous if it hadn't, given it was so soon after the float.

In October 2003, the company expanded further, buying the 10-store Gardner Fashions chain with the intention of converting them to Rendells women's fashion stores.

But from then on, Postie Plus started to disappoint the market, reporting lower-than-expected sales at Rendells and Arbuckles. By the time it reported its results for the year ended last July, it was talking about "additional restructuring expenses of $574,000 that were not foreseen at the time the prospectus was prepared".

That meant the bottom-line profit was $4 million compared with the $4.35 million prospectus forecast, although its sales were slightly higher than forecast at $108.5 million.

But by the end of October, the company came to the realisation that its strategy to make Rendells into a national chain wasn't working.

It converted five of the seven Auckland stores to the Postie Plus brand. The other two Auckland stores, in Henderson and Pukekohe, were too close to existing Postie Plus outlets and they and four of the former Gardner stores are still trading under the Rendells brand.

Young agrees a chain of just six stores doesn't look like a viable brand but says the company hasn't yet decided what to do with them.

"They're actually trading reasonably well," he says.

While the company had researched Rendells before buying it - finding it had a reasonably strong following in Auckland - "we probably confused recall with the value of what the brand stood for".

Postie Plus had wanted to broaden Rendells' appeal but that proved much more difficult than expected.

The customers it was aiming to attract saw Rendells as the place where their mothers and grandmothers shopped and, therefore, not for them.

Postie Plus also struggled with Rendells' staff, many of whom were long-serving, ageing and set in their ways, rather like the chain's customers.

"One of the things a lot of people underestimate during this process is the cultural implications. They're huge," Young says.

That wasn't the case at Arbuckles, which had "a service culture", and what was needed there was a lift in the quality of the merchandise.

"Frankly, product issues are a lot easier to address than people issues."

Young won't say he regrets the Rendells purchase.

"What we should have done is convert it into Postie Plus very quickly."

He says the Auckland sites are good and the five converted stores are now among the company's best performers.

The company paid little in goodwill for Rendells, most of the $7.02 million purchase price being for stock.

There was also too much optimism over how quickly changes made at Arbuckles would feed through into improved sales.

This, combined with the problems at Rendells and poor trading in November and December due to bad weather, translated into a $500,000 first-half bottom line loss.

Although the company managed a 5.3 per cent rise in sales, same-store sales fell 5 per cent. That was all due to Arbuckles because Postie Plus same-store sales were up 6 per cent.

As well, both chains' profit margins were hit - Postie Plus down 1 per cent and Arbuckles down 3.4 per cent.

Young says the actual margin levels are commercially sensitive, although most retailers would be somewhere between 40 and 55 per cent of sales.

He is optimistic that Postie Plus margins will recover, given that the drop was due to discounts as a result of poor weather.

The company now says it underestimated Postie Plus potential growth. The biggest opportunity comes from market shifts by its competitors, Young says.

The Warehouse has moved downmarket with its clothing, focusing on lower prices, but Farmers has moved to higher-quality clothing at higher prices.

Young says that creates growth opportunities for Postie Plus in the middle market.

But he thinks Arbuckles' margins are more likely to settle round present levels.

"It's difficult in commodity-driven areas such as manchester to recover that margin. Our focus has been on recovering that by better management of overheads and staffing structures."

The company is confident it's back on the path to recovery, predicting a $3 million pre-tax profit for its second half, up from $2.9 million in the previous second half.

If Young's strategy works, the pay-off should start showing in the following year.

In the meantime, he isn't interested in more acquisitions but in proving the potential of the company's existing assets.

"As a relatively new listed company, we still have to establish our credentials."

Facts and figures

Postie Plus Group HQ: 359 Lincoln Rd, Christchurch.
Profile: The company runs four retail chains: Postie Plus and Rendells, both selling womenswear; Arbuckles, which sells manchester; and Babycity, which has been expanded from seven to 10 outlets since being bought in 2002.
Key financial statistics: The company reported a $500,000 net loss for the six months to January 31 but is predicting a turnaround to a $2.3 million net profit for the full year.
Market capitalisation: $28.8 million.
Major shareholders: Cadella, which is owned by various members of the Dellaca family and others, with 50 per cent.
Key executives: managing director Paul Young and chief financial officer John Burnell.