Briscoe Group

For the third year in a row, retailing performance is likely to be low on the list of concerns among shareholders attending the annual meeting of The Warehouse in Auckland tomorrow.

The questions are likely to be the same as they were in late 2006. Is the company going to be taken over and when?

Stephen Tindall, who controls around 52 percent of The Warehouse, still holds the key to the future of the company he founded. As he is just a non-executive director of the company these days, it is unlikely he will be scheduled to speak to Friday's meeting. But it is probable that shareholders will put the pressure on (as they did last year and the year before) for him to get to his feet and say a few words. It's likely, however, that once again shareholders will get little meat on the carcass. Tindall will most probably reiterate that he will aim to do the best by the company and the shareholders.

Behind the scenes there will have unquestionably have been very recent further, separate, negotiations between Tindall and the supermarket giants Woolworths and Foodstuffs over a possible takeover. Both of the supermarket giants were blocked from making bids when the Commerce Commission successfully appealed against a High Court ruling that such bids could be made.

However, on October 9 The Warehouse blew that out of the water by deciding to stop the move it had made into supermarket retailing with its Warehouse Extra concept. While analysts have speculated that one or both of the supermarket companies will reapply for Commerce Commission approval, they are wrong. Neither party will, because neither party now believes it needs to.

The commission's argument had been that independent Extra could lead to increased competition in the supermarket sector. But Extra is now being wound down and the hurdle is gone. The Warehouse is well under way with plans for the three Extra stores to be converted simply into normal Red Shed general merchandising stores. The company has put the exit and restructuring costs at $10m to $12m before tax but says the move will lead to annualised pre-tax improvements in operating earnings of about $9m. With Extra out of the way both Woolworths and Foodstuffs are keen to strike a deal with Tindall. But price is the big snag.

Before the commission blocked any takeover Woolworths had indicated it was prepared to offer $7.15 a share for The Warehouse. The Australian company paid $6.50 a share for its 10 percent stake, compared with Foodstuff's entry price for its 10 percent holding of about $5 a share.

Doubtless both supermarket companies will now be arguing conditions have changed enormously since 2006 and therefore any acquisition of The Warehouse should be at a much lower price level. The Warehouse stock has been hovering under $4 recently.

From Tindall's perspective, however, there is little reason to rush. He does not have to sell and he will hold out for what he sees as the right price, still likely to be about $8. It appears unlikely any deal will be reached before Christmas and, indeed, Tindall will probably want to see how The Warehouse handles its most crucial trading period in what are truly awful times for retailers.

Shareholders are likely to get a brief update at the annual meeting on latest trading. However, this will probably not add much to the $322.4m first-quarter sales figures presented to the market on November 7.

Both on an overall and same-store basis, the figures were down 1.6 percent on the same time a year ago. Other major retailers such as Briscoe Group and Hallenstein Glasson have actually reported much bigger drops than this recently - Briscoe down 8 percent and Hallenstein Glasson nearly 7 percent lower. As a store that grew up in relatively tough times in the 1980s and 1990s, The Warehouse would rate its chances of holding, and perhaps even increasing, its market share during the downturn.

Relatively robust Christmas trading figures would provide Tindall further ammunition with which to drive up any takeover bids. The likelihood remains that a deal will be done, possibly more toward the middle of next year.

Woolworths and Foodstuffs would still be able to raise the cash despite the credit crunch. Woolworths may ultimately be the more desperate to bolster its position in New Zealand since anecdotally it is still losing supermarket share to Foodstuffs.

In 2006 pretty much all the shareholders present at The Warehouse's annual meeting believed that it would be the last one. Three meetings on nobody will want to be so bold as to definitely say this will be the last time - but it really might be.

Michael Hill’s relatively subdued mood at today’s annual meeting was a realistic reflection of the state of the retail sector. Sales are depressed and most companies are hoping for, rather than forecasting, a good Christmas period.

Hill told shareholders - rather tongue in cheek - that he is optimistic about the next few months because he expected individuals to stop buying yachts and purchase jewellery instead.

Figures in the following table show that the listed retail sector is depressed, particularly as far as the New Zealand operations of NZX listed companies are concerned.

On Monday Briscoe reported that group sales for the quarter ended 26 October were down 11.2% compared with the same period in the previous year, with Homeware sales off 10.2% and Rebel Sports 13.3%. Managing Director Rod Duke said August and September were poor but October was a bit better.

On the same day Hallenstein reported an 8% fall in NZ sales for the 2 August to 31 October period and noted that “trading conditions in New Zealand have been more difficult than Australia”. Finally, The Warehouse told the NZX this morning that group sales for the quarter ended 26 October were down 2.1% with Red Sheds’ sales off 1.6% and Warehouse Stationery 5.6% lower. The company reaffirmed that it expected consumer spending and trading conditions to remain subdued for some time.

These year-on-year sales figures compare with the country’s 5% annual inflation rate. Retail sales are usually subdued during a general election campaign but this election has been exacerbated by wall-to-wall media coverage of the international credit crisis.

Most retailers are highly dependent on the Christmas period and this year will be particularly important because of the depressed trading throughout most of 2008. The retail sector, particularly small mom and pop outlets, will face serious financial difficulties next year unless consumers open their wallets between now and 25 December.

Retail landlords must focus less on the bottom line and more on their tenants' needs or risk being lumbered with a portfolio of empty stores, say leading retailers.

High interest rates, a sluggish housing market, unprecedented fuel costs and inflated food prices have hit consumers hard, leaving all "but a lucky few" retailers juggling high rents and low sales. But with the gloom showing no sign of lifting soon, pressure is mounting on landlords to adapt to market conditions and work with retailers to see out the tough times.

Speaking at the Property Council's annual retail conference in Auckland, Stephen Alach, the general manager of surf retailer Amazon, said too few landlords appreciated how hard retailers were being hit by a downturn that extended from before Christmas. "All bar a few [landlords] don't look at anything except the dollars. They won't last if they continue with this ducking and diving attitude to tenants," he said. "Rent demands stay the same while some retailers are dealing with the reality of sales being up to 60 per cent down [on last year]. If the landlords don't react soon they are going to lose a lot of tenants."

Though retail giants like The Warehouse Group and Briscoe Group could survive the harsh times, independent retailers are more likely to "take their losses and walk away" rather than risk parting with more and more cash, Mr Alach says.

"It will be the landlords who feel the squeeze when tenants pull the plug and walk away. There needs to be a better understanding if we are going to get through this."

Landlords needed to spend more and think outside the box to draw consumers away from their comfy couches and plasma screens into the shopping environment, he said. This meant generating new store concepts with tenants, being more realistic about rental returns, and looking 10 years ahead instead of just one or two years.

"When you're caught in a wave, you can't breathe - you feel like you're choking. That's how it is for retailers at the moment, and that's how it will be for landlords if they don't react."

According to Statistics New Zealand, 15 of the 24 retail sectors had lower sales in the March quarter than in the last quarter of 2007. Those who are highly reliant on discretionary spending had a particularly tough year. Appliance stores experienced a 15 per cent fall in sales, furniture and flooring took an 11 per cent hit, and clothing lost 6 per cent.

New Zealand Council of Shopping Centres president Evan Harris said landlords needed to take a more "constructive" approach and "realise some of the pain" that retailers were suffering. However, John Bougen, director of national retail property developer Prime Retail, said the answer lay in fostering new tenants. "There will be demands for rent reductions. It's a call we will all be forced to consider over the next few months. The question is, `How long will it last?' Longer than a bank guarantee," he said. "[Landlords] need to consider fostering new tenants. They may not be the tenants you want in the good times. In the 1990s [recession], we had them on short-term leases so [that when things improved] they could be moved with dignity."

Pumpkin Patch shares are continuing to surge in value after multimillionaire Kathmandu founder Jan Cameron disclosed a 6.3 per cent interest in the children's clothing retailer.

The shares are now up 12 cents, or 8.5 per cent, to $1.52 from the four-year low of $1.40 hit on Friday shortly before the reclusive Tasmanian resident Cameron disclosed her holding. Cameron is the second wealthy retail investor in a few months to disclose a holding in Pumpkin Patch. The majority shareholder in Briscoe Group, Rod Duke, has built a 10 per cent stake.

Pumpkin Patch chairman Greg Muir said today he was "comfortable" with the new investors. "It is two well placed New Zealand investors who obviously recognise that the company is undervalued at the moment." On Cameron, Muir said: "She's been building that [stake] over many months - we've known about that. We haven't had any dialogue with her at all. It is for her to discuss. We are quite comfortable. We've got no issues with it."

While the moves by both Cameron and Duke will lead to speculation that one or both may seek to assert influence on the future running of Pumpkin Patch, Muir said he believed both might be passive investors. Neither had sought a seat on the board at this stage. "They've certainly made no representations to us in that respect, but I can't answer what their intentions are."

The moves from both the investors come as Pumpkin Patch, a former sharemarket darling, has seen its share price pounded as investors worry about apparent speed wobbles the company is hitting in its US and British expansion. There is also concern about its stock levels, which have risen sharply this year and its debt levels, which may now be as high as $95 million from virtually nothing two years ago.

Cameron sold Kathmandu to private equity partners Goldman Sachs JBWere and Quadrant in 2006, reportedly for about $275 million. Subsequently she has built a 15 per cent stake in Postie Plus. She also recently bought the Arbuckle's stores from Postie Plus. In addition she has opened five homeware stores in New Zealand under the brand name Nood (New Objects of Desire).

Pumpkin Patch's shareholder register is now getting crowded. The biggest individual shareholder is still believed to be South African investor Setar Motani, with about 12 per cent - though this shareholding has reduced in the past few years. Another investor who has reduced his shares since the company floated in 2004 is managing director Maurice Prendergast, who currently owns about 6.2 per cent, down from 8 per cent a few years ago. Fisher Funds Management has recently sold down its stake to around 6 per cent as well.

Pumpkin Patch shares were listed in mid-2004 at $1.25 a share. They rose to as high as $4.95 on a wave of enthusiasm about the company's moves to become a global brand. However, in more recent times the expansion into the US and Britain has appeared to hit speed wobbles.

Market expectations had been for a profit this year of about $22 million to $23 million, down from $27.6 million. But it is likely analysts will further trim earnings forecasts after a recent Asian investor roadshow presentation by the company that talked about tough conditions in Britain and the US.

New Zealand's biggest retailer, the Warehouse Group has revised downwards expected annual after-tax earnings by about 10 per cent.

The key contributing factor was a marked downturn in consumer spending since the latter part of May, which had significantly reduced the company's sales and margin expectations for the remainder of this financial year, the company said today.

After-tax earnings for the year ending July 27 were now expected to be between $84 million and $88 million, including reversal of warranty provisions of $7.2 million. The previous range was $94 million to $98 million.

For The Warehouse stores, sales for the month of May were 4.8 per cent ahead of last year on a same store basis, reflecting an expected improvement in performance following a difficult third quarter. Customers responded well during the period to a strong seasonal offer in both apparel and home products, the company said. But consumer confidence and retail spending had deteriorated markedly in recent weeks in response to increasing inflationary pressures on fuel and cost of living.

The company's June and July sales were now forecast to fall well below previous expectations. At Warehouse Stationery sales for May and June month to date were 7.7 per cent below the same period last year.

The Warehouse downgrade comes one day after number two retailer Briscoe Group warned shareholders to expect up to an 80 per cent drop in half year net profit after tax.

In an update to the market yesterday, the operator of Briscoes Homeware, Living & Giving and Rebel Sport stores said it expected net profit after tax for the six months ended July 27 to be between $2 and $3 million. The group had posted a $10.5 million profit for the same period last year. Managing director Rod Duke said like other retailers, it has been experiencing extremely difficult trading conditions, with consumer confidence at its lowest in 17 years. Duke expected the challenging times to continue, with second half results expected to be lower than last year's. But the percentage decline would not be nearly as large as the first half's, he said. Briscoe shares ended yesterday down 11c at 99c.
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As retail trouble spreads across the country, one big firm has announced expansion plans. Hardware retailer Bunnings Warehouse, owned by Australian conglomerate Wesfarmers, it has six new stores planned, which should mean 500 new jobs.

Company general manager Brad Cranston said the fifth of its Auckland stores will be built in Westgate, Waitakere City. "We are pleased to announce plans for this new store for West Auckland. Westgate and the wider West Auckland region is certainly an area of constant growth," Crantson said in a press release.

Bunnings Warehouse has recently unveiled development plans for four further stores in Wellington, Upper Hutt, Gisborne and Dunedin. "The New Zealand market is extremely competitive," said Cranston. "But we have a proven and robust business model that enables us to deliver value to customers. The success of recent new stores in Christchurch and Auckland's Mt Roskill is encouraging and fuelling our commitment to continue at least open three new stores per year," he said.

Cranston said that while plans and locations are not finalised, Bunnings see the Hawke's Bay, Taranaki, South Auckland and Auckland's North Shore as potential areas for further stores.