KEY POINTS:
Retailing is a competitive and unpredictable business and the share price performance of the largest listed companies reflects this.
Many brokers had a buy recommendation for Pumpkin Patch a year ago but its share price has fallen from $3.98 to $3.25, while Michael Hill International was rated a hold yet its price has surged from $6.95 to $10.50.
Stephen Tindall announced his intention to privatise The Warehouse on September 14, 2006, when its share price was only $5.11. The company has been on a roller-coaster ride since then with its price surging to a high of $7.32 after the announcement of proposed offers by Woolworths and Foodstuffs.
Retailing is difficult but operators with successful offshore activities, or those that are subject to a takeover offer, have above average sharemarket valuations.
Michael Hill has been the stand-out performer in the past 12 months with earnings before interest and tax (ebit) of $35.1 million for the June 2007 year compared with $24.3 million for the previous year.
The jeweller now has 192 stores with 126 outlets in Australia, 50 in New Zealand and 16 in Canada. As can be seen from the accompanying table, only $97.4 million, or 28 per cent of its sales, are in New Zealand.
Michael Hill, as with most retailers, has higher margins in New Zealand. In 2007 its domestic ebit margin was 13.9 per cent compared with 11.2 per cent in 2006, while its Australian margin was 9.2 per cent compared with 7.9 per cent in the June 2006 year. The Canadian operations broke even on an ebit basis in 2006-07 after the previous year's $1 million loss.
Michael Hill will continue to pursue its aggressive growth strategy as it plans to open 26 new stores in each of the next three years, mainly in Australia and Canada. The only negative feature is that it will not be able to pay a fully imputed dividend as its offshore earnings continue to expand.
Directors have not given a specific guidance for the current year but investors have reacted positively to the planned 10-for-one share split in November.
Rod Duke has failed to produce the same magic at Briscoe. The homeware and sportswear retailer, which has no offshore operations, reported ebit of $34.5 million for the 12 months to July 29 (the second half of the January 2007 year and first half of the current year) compared with $37.2 million for the previous corresponding 12 months. Its ebit margin slumped from 10.4 per cent to 8.7 per cent between these periods.
Duke said the poor result was due to the slow start to winter and the two new homeware divisions, Urban Loft and Living & Giving, being heavily weighted to the August-to-December period. Briscoe is hoping for better trading conditions in the months ahead but it is heavily dependent on the Christmas period.
One of the company's attractions is its strong balance sheet, which has $34.8 million of cash and no debt.
Postie Plus, which operates the Postie+, Arbuckles and Baby City outlets, has been a major disappointment since listing in September 2003 after the issue of shares at $1 each.
Its ebit for the 12 months ended January 31, 2007 (the second half of the July 2006 year and first half of the July 2007 year) was $4.9 million compared with $5.2 million for the previous corresponding 12 months and its margin fell from 4.5 per cent to 3.7 per cent.
Postie Plus was in the news this week when it was revealed that Jan Cameron, the founder of Kathmandu, had bought 8.6 per cent of the Christchurch retailer for $2.7 million.
The reclusive Cameron, who has shifted from Christchurch to Hobart, has plenty of capacity to make a full offer for Postie Plus as she realised over $200 million from the sale of Kathmandu.
Hallenstein Glasson is the enigma of the sector because it is an excellent retailer, with exceptionally high margins, but its Australian strategy has not been as successful as those of Michael Hill and Pumpkin Patch.
Yesterday the company announced ebit of $30.4 million for the August 1 year compared with $30.6 million for the previous year and a margin of 15.2 per cent compared with 15.6 per cent in 2005-06.
It had revenue of $28.5 million in Australia, or 14.2 per cent of total sales, and reported a profit of $313,000 across the Tasman compared with a small loss in the previous year.
The company has 25 Glassons stores in Australia and 86 outlets in New Zealand (36 Glassons, 47 Hallensteins and three Storm).
Hallenstein Glasson's share price performance is highly dependent on the ability of a yet-to-be-appointed managing director - former chief Cliff Kinraid resigned on May 31 - to achieve profitable growth in Australia. Without a better performance in Australia, the company's main features are a solid but unspectacular domestic operation, high dividend yield, $28.4 million of cash and no debt.
Pumpkin Patch's result for the July 31 year, which will be released on Monday, is awaited with interest as its share price has fallen from a high of $4.95 on January 23.
On June 8 the company issued a profit downgrade, mainly because of the high New Zealand dollar and quotas imposed on Chinese-made Pumpkin Patch products in the US and Britain. The company indicated that its net earnings for the year would be between $26.5 million and $28.5 million compared with $28.5 million for the July 2006 year.
This implies ebit of $46 million and a margin of 12.6 per cent compared with ebit of $44.9 million and a 14.4 per cent margin in the June 2006 year.
Pumpkin Patch has the greatest exposure to offshore markets in terms of revenue and outlets.
It planned to have 206 stores at the end of July with 101 in Australia, 33 in the United Kingdom, 20 in the United States and 52 in New Zealand.
A number of issues will be raised at Monday's results briefing including current trading conditions in Australia and New Zealand, the store rollout strategy in the United States and 2008 year prospects in the challenging British market.
Yesterday The Warehouse reported ebit from continuing operations of $153.1 million for the year ended July 29 and a margin of 8.7 per cent compared with $152.0 million and 8.8 per cent for the previous year.
Directors have taken a cautious view of the current year and "would not expect 2008 net profit after tax to be higher than adjusted net profit after tax for 2007".
But the key issue for Warehouse shareholders is the appeal against the Commerce Commission's decision to reject applications by Woolworths and Foodstuffs to acquire 100 per cent of the company. This appeal has a strong chance of succeeding, particularly as The Warehouse has joined the two potential bidders in the High Court hearing.
If the appeal is successful Woolworths is expected to make a takeover offer for The Warehouse. With supermarket sales of A$3.94 billion ($4.6 billion) in New Zealand, Woolworths is far bigger than allour listed retailers combined.
However, its supermarket margins are only 3.9 per cent compared with 5.8 per cent in Australia and The Warehouse might be the catalyst to lift its disappointing New Zealand performance.
* Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.
