Richard Inder: Beware the cost of a smoko

JUDGEMENT CALL

SkyCity boss Evan Davies should take a close look at how the casino operator handled yesterday's profit warning.

SkyCity has been hit by the smoking ban and troubles introducing new technology designed to stop gamblers feeding the pokie machines with large denomination notes.

The smoking ban limits the amount of time punters can spend dropping cash into SkyCity's coffers. Initially, SkyCity estimated losing $10 million in takings this year but, optimistically, forecast they would recover. So far they have not recovered as fast as anticipated.

The ticket-in ticket-out system, which requires punters to load up cards with cash, rather than ramming it straight into a pokie, has been beset by problems.

Instead of introducing the technology by September last year, SkyCity now reckons it will not be operating until the middle of winter. The limit on larger notes means less takings in the meantime.

The firm now expects full-year earnings to fall from its earlier guidance of between $114m and $119m to between $100m and $103m.

The problems hurt earnings, so a re-rating of the share price is justified. They are also, in the normal course of business, what makes risk capital risky.

However, analysts had been on to the costs of the ban and the technology problems for some time. In April and early this month, a majority of those covering the company downgraded their forecasts to below the company's guidance.

Macquarie Equities, after surveying the slot-machine takings of a number of charitable trusts, even told the Business Herald just over a-week-and-a-half ago, the firm had underestimated the cost of the ban.

On the day, SkyCity told the Herald: "[Our] experience has not been significantly different to our initial projections."

Davies said the only difference between now and then was a week-and-a-half of financial information.

"These things are cumulative."

This statement does not wash with the magnitude of the downgrade. Davies needs to ask how the company was so out of step with the market and whether it could have communicated its doubts any earlier. Judging by the plunge in Sky City's share price yesterday, investors believe it could.

SLOWING TO A SIMMER

The boiling economy has steadied to a simmer.

March quarter retail sales figures out yesterday showed a rise of just 1.3 per cent adjusted for the season and inflation, well below economists forecasts of a 2 per cent rise.

Employment figures on Thursday defied expectations with increase in the labour force outstripping employment growth.

The unemployment rate rose from the historic low of 3.6 per cent three months ago to 3.9 per cent.

Although still indicative of an extremely tight labour market, this figure compared with economist predictions of a further tightening to 3.5 per cent.

These figures came hard on the heels of economic data showing a sharp decline in consumer confidence and weaker-than-expected wages growth.

All of this is playing out before a backdrop of high levels of household debt, decreasing household income as fixed term mortgages are refinanced on to the now-higher fixed rates and a decline in immigration.

Corporate New Zealand has also been getting jittery. The Warehouse was the latest, this week warning of "increasing pressures on consumers generated by rising fuel costs and increased mortgage payments".

There are signs that bank profits are slowing, as the latest KPMG survey showed last week.

The question is: how steep will the slide we are on turn out to be?

The dollar - still riding above US70c - is squeezing the rural sector, which the Waiheke foot-and-mouth disease scare showed is still the backbone of our prosperity. Manufacturers are also hurting.

One currency trader in New York told Bloomberg that the fresh cracks in the foundation of the New Zealand dollar would widen in the coming months. One can only hope more of his ilk begin to recognise the same.

GLIMMERS OF HOPE

The Warehouse chief executive Ian Morrice can be forgiven for feeling a little aggrieved. First the company was hit by the rain in the lead up to Christmas and then the Indian summer weighed on the already struggling business.

Third quarter sales were down by just under 1 per cent to $489 million, while same store sales at the key Red Sheds division fell 2.5 per cent.

Still, Morrice showed he is injecting new ideas.

In April, The Warehouse introduced a new Price Rollback programme to compare 5000 prices a week with its rivals, and assure customers products with the tag offer the lowest prices in the country.

It is also distancing itself from many one-off discounts and weekend sales. Only sales like traditional end-of-season sales will be maintained.

The company also bought in improved store display standards in the quarter and made progress on a supplier management programme aimed at discounts and quality improvements. And it says the programme is on track to deliver cost savings of between 2 and 3 per cent.

Full year results, due at the start of September should provide the first test of whether these ideas work.