World cotton price rise latest hit for retailer

Hallensteins said sales were weaker than expected over Christmas. Photo / Paul Estcourt

Hallenstein Glasson says the impact of rising food and petrol prices has wiped out extra spending power shoppers got from tax cuts and it warns that it is struggling to contain the impact of rising cotton prices.

The clothing retailer says world cotton prices have doubled during the past year. To secure fixed contracts, it has to pay suppliers earlier than in the past, pushing up pre-payment costs by $5.7 million from $225,000.

Chief executive Graeme Popplewell said competitive pressure meant cotton prices had not been passed on but this could not continue indefinitely.

"It's affecting our bottom line as much as anything else. The market's not really allowing it but pressure is building and eventually that will spill out to increased retail."

Hallensteins yesterday announced its half-year net profit fell 16.5 per cent to $7.14 million, as sales at Glassons were weaker than expected over Christmas. Revenue for the six months to February 1 fell 1.7 per cent from a year earlier to $100.61 million.

The company said sales during Christmas were critical to profit and in the latest period it had struggled to achieve targets. Competition had been particularly intense in women's apparel. The year has started softly. Group sales for the season to date are 3.7 per cent down on the prior year. However, sales are flat adjusting for the impact of closed stores in Christchurch as a result of last month's earthquake.

Popplewell said petrol well over $2 a litre was starting to hurt discretionary spending.

"Rising petrol prices can tip the scales and turn the spending off and we're concerned we've hit that mark. It's the one thing that is a trigger rather than interest rates." The earthquake had affected turnover to "varying degrees" in all of the group's 14 stores in Christchurch. Seven stores remained closed.

Chairman Warren Bell said Glassons in Australia had shown a steady improvement since January, in spite of strong competition in that market.

During the past two months the company had refurbished five stores in Australia with a new Glassons concept and in April an additional store would open at Hurstville in Sydney.

"These stores are showing positive results although more time is needed to evaluate their ultimate success," he said.

"The general economic environment can best be described as 'challenging'. The rising cost of food and petrol has an immediate impact on our customers, and any benefit received from lower tax has been offset by price increases in these core consumer items."

Goldman Sachs retail analyst Buffy Gill said the results were in line with expectations but higher margins were greater than anticipated operating costs.

Operating costs increased significantly as a percentage of sales, up to 44 per cent compared with 40.7 per cent.

"In particular, we estimate employee costs per store increased by 5 per cent year on year, lease costs per store increased 1.6 per cent year on year and other head office overheads increased by a total of 7.2. per cent," she said.

The dividend was maintained at 14c a share. The company said $8.35 million would be paid in dividends, which although $1.2 million higher than after-tax profit for the period was "comfortably managed" given the group's cash reserves of $20.1 million.

The company's shares closed up 2c at $3.73 yesterday.