Jenny Ruth: Stitching up a hopeful future

It's never a good look when a company has to lower its profit forecast, particularly not when it comes from a company with a chequered career such as Pod, formerly Designer Textiles, has.

The size of the downgrade, made early this month, was also reasonably severe: instead of net profit after tax but before goodwill amortisation for the year ended June matching last year's $4 million result, the company now expects the figure will come in between $3.2 million and $3.6 million.

The bottom line will look even worse because it will include about $600,000 in goodwill amortisation compared with only $335,000 in the previous year.

The $4 million forecast was made in February when the company released its first-half net profit result which was a 9 per cent rise to $1.7 million and which included $306,000 in goodwill amortisation compared with none in the previous first half.

The company blamed the downgrade on three things: slowing retail sales in May and June, which are traditionally strong selling months; spending on upgrading information technology systems; and pricing pressure from customers.

The latter is mainly due to The Warehouse demanding 10 per cent price cuts from its suppliers. The Warehouse accounts for about 50 per cent of the sales of Pod's Mollers division.

Pod's shares had already been heading south after peaking at $1.77 in November last year. They fell another 17c to $1.02 after the profit warning, although by yesterday they had recovered somewhat to be be steady at $1.13.

It certainly didn't help the share price any in mid-June when Fisher Funds Management announced it had sold most of its 6.14 per cent stake.

So is the company returning to its old ways? (While it chalked up three years in a row of improving profits, in 2001 it reported an $11.6 million loss and the company was still carrying $5.2 million in accumulated losses at December 31, 2004.)

There are a few reasons to believe that isn't the case.

Carmel Fisher, of Fisher Funds, said her decision to sell out of Pod wasn't so much related to how the company was performing but that she had been unable to build a larger stake. And over the last four months, she had wanted to increase her holdings of other stocks and so had to sell something.

"It's not that we've changed our view on it," she says. "I think it's a reasonable company. I'm going to be interested to see whether they can achieve the growth and improvement and turnaround that we hope they can in the next year or so."

The company had its mind made up for it as to what to do with one of its biggest problems when its Logan Textiles factory in Brisbane burned down in October last year. The company bought Logan in 1996 and then wrote of $8.8 million in goodwill a year later.

Its staff had been struggling to turn around the loss-making business but it had only just reached break-even point. The company expects to realise between $6 million and $7 million from the business closure including $4 million in insurance, which will strengthen its balance sheet.

Forsyth Barr analyst John Cairns estimates Pod could fund acquisitions up to $10 million from its balance sheet and without recourse to shareholders.

The result also includes a number of one-off factors. The company's technology and infrastructure upgrade has clearly increased its overheads - corporate costs rose from $600,000 in the second half of 2004 to $1.4 million in the first half of this year. That also reflects the company's costs of investigating an intended acquisition which it ended up walking away from, deciding its likely earnings contribution wouldn't be worth the risks.

Shareholders ought to take comfort from the fact that although managing director Mark Bilton clearly wants to buy more businesses, he is able to leave targets that don't measure up.

The company also had one of its large export customers go into receivership and so had to write off some receiveables.

Bilton says the company has also borne the costs of opening offices in Melbourne and China where it is increasingly sourcing products.

Winter coming late after a poor summer didn't help the company's Michelle Ann business, which designs garments for several retail chains including Farmers, Glassons and EziBuy. The clothes are manufactured in China at two dedicated factories.

Bilton said the company was set up to supply retailers with quick deliveries and the weather and a general slowdown in retailing meant its customer simply didn't need stock.

But the biggest problem has been in the Mollers business. After The Warehouse's demand for price cuts, Bilton said he would counter this by trying to supply a wider range of merchandise to the discount retailer - previously it had supplied only curtains, Mollers' original business - but is expanding into a wider range of homewares. He also wanted to expand Mollers' range of customers to lessen its reliance on The Warehouse.

Those strategies are beginning to be implemented. Bilton says Mollers is now selling The Warehouse duvets for the first time and is also negotiating over other products. "We've taken a margin hit so we have to put a lot more on the shelf."

The Michelle Ann contacts are also coming in handy. Pod bought that business in November 2003. Bilton says Mollers is now supplying Farmers, Arbuckles and EziBuy for the first time. About 20 per cent of Mollers' products are now sourced from offshore.

The company's third division, Designer Textiles International, which makes fabrics including fine merino wool fabrics, continues to trade strongly, Bilton says.

That division chalked up a more than 25 per cent increase in sales in the first half.

Who, what, where

Head office: 64 Porana Ave, Glenfield, Auckland.

Profile: The company has three operating divisions: Designer Textiles International, which makes fabrics including fine merino wool fabrics; Michelle Ann, which designs garments for several retail chains including Farmers, Glassons and EziBuy, whose clothes are made in China at two dedicated factories; and Mollers Homewares.

Latest results: the company expects net profit after tax but before goodwill amortisation for the year ended June will be between $3.2 million and $3.6 million, down from $4 million the previous year.

Management: managing director Mark Bilton, chief financial officer George Gin.