Terry Hall

These are tough times in the rag trade. Mainly because of poor summer weather that discouraged people from buying lightweight fashion clothes and sportswear, the bigger stores are coping with what is regarded as one of the more challenging periods seen in New Zealand retailing for many years.

Hallenstein Glasson, Postie Plus, Briscoes subsidiary Rebel Sport, The Warehouse, Pumpkin Patch and Hellaby Holdings have all seen their profit margins under pressure. Most reported sales were unexpectedly low due to the wintry weather up to Christmas. They then felt compelled to slash prices drastically in New Year sales to move unwanted and soon to be out of fashion stock.

This rush of sales and heavy discounting after Christmas was presumably the reason the Statistics Department reported a stronger than expected rise in retail sales in January, a factor that led the Reserve Bank to lift interest rates. Statistics reported that total core sales rose by 1% in January. At the time, economists said this was due to people having more money in their pockets due to full employment, lower petrol prices and savings coupons from supermarkets that cut up to 20 cents a litre from the cost of filling a car.

However, the latest crop of retail profit results suggests that few stores were actually making much money from their efforts to quit stock.

There are also signs that some consumers are feeling constrained about spending. Rising interest rates must also be starting to bite. In a March report, the ANZ Bank said Aucklanders had been spending less in the shops, a trend that extended to Wellington. In other centres, shops were benefiting from higher dairy prices and lifts in some other farm exports.

The latest round of first-half reports showed a marked change from the generally positive results reported this time last year. As an example, in March last year Hallenstein Glasson announced a stunning 29% rise in earnings. On Monday, they reported an 8.6% drop in earnings to $10m, though this was in line with earlier warnings from directors that they were finding trading difficult.

Hallenstein Glasson said revenues of $110.7m were 1% ahead of this time last year. However, there had been a drop of 7% in same store sales in Australia and New Zealand. Earnings from its Australian stores also suffered from having to cope with a high NZ-Australian dollar exchange rate.

Carolyn Holmes of ABN Amro said this result highlighted the swings and roundabouts in apparel retailing. Next year could easily swing the other way for Hallenstein Glasson. She raised her target price from $5.42 to $5.52.

Postie Plus lifted first-half sales by 12.5%, helped by new store openings. However, it recorded a small $500,000 loss, compared with a profit of $700,000 in the same period of last year. Analysts said the company cleared summer stock earlier than usual at low prices to create space for higher profit margin autumn and winter ranges.

Hellaby Holdings - owner of the BBQ Factory, Number One Shoe Warehouse and Hannahs - said trading had been very difficult due to competitive pressures caused mainly by adverse weather conditions. The group sold its Rodd & Gunn chain last July. Hellaby's other subsidiaries reported mixed fortunes - its automotive division, which includes Brake & Transmission, did well, but its industrial group was hit by strong competition. Overall, Hellaby's first-half tax-paid profit fell 70% to $2.8m, which was in line with previous profit warnings from the company.

While most shareholders now consider Pumpkin Patch a global player, it retains an important local presence, with 50 stores, including an extra four opened in the past year. First-half sales in New Zealand rose by 3.5% to $31.1m, but ABN Amro estimates that sales in the average store fell by 2.7%.

Pumpkin Patch's biggest problem was in Australia, where it encountered difficult trading conditions, and profitability was affected by costs associated with store openings. Earnings before interest and tax rose by a modest 3% to $16.3m. But the Australian wholesale division did better than expected. Pumpkin Patch's best result was in the United States, where it has opened 20 stores over the past year. First-half sales there rose 344% to $US7.1m ($9.97m), much better than analyst expectations. Results from other countries, including the United Kingdom, were in line with expectations.

You can't keep a top retailer down. Since 1990, when Rod Duke bought control of Briscoes, he has transformed it from a small chain of loss-making shops offering a sparse range of tawdry goods into one of the country's most upmarket and successful retailing groups.

It seems as if the homeware stores which bear the Briscoe name may be reaching the end of their strong growth phase, which has seen their development into a chain of 37 attractive shops in major centres. It plans to open only one new store a year over the next few years till it reaches between 40 and 45.

But that doesn't mark the end of Duke's ambitions. He opened six new Rebel Sport stores in the past year, bringing the total to 27, and intends to open a further one or two over the next few years until he reaches about 35. Rebel Sport's Australian operations are in the throes of a takeover battle, with major institutions holding out for a higher offer, although this does not affect New Zealand. In 1990, Duke negotiated a limited franchise agreement with Rebel Sport Australia, with the first store opening in Auckland in 1996. He gained exclusive rights to the Rebel Sport brand in this country in 2005.

Duke says there is great potential in the Living & Giving chain, which he bought from Eric Watson late last year. This chain of nine stores had never performed well, and was said to have been operating around break-even at the time of the sale. Duke believes they have a lot of promise, and plans to open 11 more in the next two years till he gets to 20.

He also intends to expand the upmarket Urban Loft chain, after the success of the first one in Auckland. A second could be opened soon in Wellington or Christchurch.

The ongoing expansion plans are being encouraged by signs that, after the odd rough patch, the company has developed successful strategies to win customers in a small, highly competitive market.

The group has just completed another successful year - regarded as a good effort after a difficult and testing second half. Other retailers who have reported challenging trading - mainly because of poor, cold early summer weather - include The Warehouse, Hellaby Holdings, owner of Hannahs and No1 Shoe stores and the BBQ Factory. In contrast, Michael Hill International, who had been finding business difficult earlier in the year, surprised the market by saying it had a bumper Christmas.

Clothing and footwear shops seem to have been the hardest hit. This seems to have affected Rebel Sport - the part of the group most exposed to selling sports apparel and shoes. Duke said: "When it is snowing in the South Island it is very difficult to sell outdoor shirts and shorts at Rebel."

There are indications the group undertook a sales programme to sell such seasonal stock and maintain market share. Sales at Rebel Sport rose by 5.4%, and Briscoes Homeware sales were up 9.8% in the latest period.

The group reported a full-year tax-paid profit of $26m, broadly in line with a forecast it made in January. Sales were up 8.3%, mainly due to new store openings, and a 10.4% increase in retail space, or selling area. Like other retailers, Briscoes is facing a substantial rise in rents: Carolyn Holmes of ABN Amro estimates rent per square metre rose by 4.3% in the past financial year, and she is forecasting this will rise another 3% this year.

Duke warned after the result that the group faces another tough year. He hopes to consolidate profitability after what he said had been the most challenging three years the company had ever faced. Immediate worries were petrol prices, household expenditure, interest rates and the housing market.

Rodney Deacon of Goldman Sachs JBWere says the outlook for earnings growth in the short to medium-term looks subdued, driven mainly by factors including lower household consumption, the kiwi dollar and a slowing retail environment. Goldman Sachs JBWere has a short-term market perform and long-term hold recommendation on the stock valuing it at $1.66.

First NZ Capital believes the company will report similar earnings this year and has a target price of $1.72 on the shares. ABN Amro rates it a hold with a target price of $1.84. UBS has a neutral recommendation and a price target of $1.71.

It has to be the perfect takeover situation. Two big players want The Warehouse - and neither wants the other to get it. And founder Stephen Tindall, and a private equity fund, might still want it.

Hindsight is a wonderful thing. Few could have imagined the country's biggest discount retailer could have attracted this much interest after being out of favour with investors for much of this decade.

The shares traded as low as $3.46 last year and $3.04 in 2005 as the group struggled with what the market judged to be an ill-conceived bid to establish itself in Australia, a venture subsequently sold after running up heavy losses.

The performance of the New Zealand stores also faltered. This led to the appointment of a new chief executive and a revamp of the Red Sheds with a more upmarket sales strategy, Price Rollback, and the gradual introduction of new Mega Stores, which include grocery and pharmaceutical sections.

This process is showing promise, though normally it would take time and sustained earnings improvements to convince the market the group was in a strong recovery mode.

However, these are not ordinary times for the company.

The share price has rocketed since Tindall teamed up to privatise the company with private equity fund Pacific Equity Partners (PEP), which has substantial interests in the food business in this country.

This was torpedoed when co-op food group Foodstuffs gained a 10% stake, seen as a defensive move to forestall The Warehouse developing into a major competitor in food.

Woolworths then responded - presumably for the same reasons - and it too has 10%. Both Woolworths and Foodstuffs are seeking regulatory approval to buy the company.

The key is Tindall with his blocking 51% stake. He has expressed a high regard for PEP, leading to speculation he may be prepared to do a three-way deal with Foodstuffs to again try to privatise the company.

Privatisation - especially with relatively passive shareholders who won't be troubled by day to day fluctuations in the company's share price (like existing shareholders) - would be an attractive option for Tindall, and allow the company to grow by adopting long-term strategies. However, with Foodstuffs as a partner he might have to retreat on promoting the grocery side of the business.

Foodstuffs might have other ideas. It surprisingly took part in a profile-raising exercise alongside other important New Zealand companies (including Fonterra) with key figures in the Australian investment world earlier this month in Sydney, when it disclosed its inner workings at the annual ABN Amro New Zealand Day in Sydney. As a financially strong independent co-op, Foodstuffs hasn't felt the need to do this before, raising speculation that something could be up.

In its first half, The Warehouse reported a tax paid profit of $61 million. This was broadly in line with previous guidance issued by the company, and 3% higher than the $59.2m for the same period of the previous financial year, not counting the one-off loss from the sale of Warehouse Australia. First NZ Capital said it was a creditable result in light of the challenging retail period, especially for clothing where sales were affected by poor summer weather. It said the new sales initiatives implemented by management were delivering results with increases in same-store sales and a slight increase in operating margins.

The company reported a sales increase of 6.6% in same-store sales in February, but expected retail conditions to remain challenging for the rest of this financial year. Management said it was comfortable with analysts' consensus forecasts of a $96m profit this year.

First NZ Capital said its stand-alone valuation for the stock at $5 was meaningless with the prospect of corporate takeover activity. "In our view the current share price reflects an expectation that Mr Tindall accepts an offer from Woolworths for the company." However, First NZ Capital said that if Tindall were to retain the status quo, or form a joint venture with Foodstuffs and/or private equity, it would expect a meaningful share price retraction. It rates the stock an under-perform with a target price of $5.75.

Goldman Sachs JB Were does not issue a recommendation on the stock, but values it at $4.61. ABN Amro rates it a hold with a target price of $6.50. Wellington brokerage Waddell Johnston McCarthy also recommends it as a hold, valuing at $4.56.