29 November 2004
COMMENTARY
Pacific Retail Group (PRG) today announced a net profit after tax of $55.4M for the six month period to 30 September
2004, in line with expectations.
Operating earnings before interest, tax and amortisation for PRG’s New Zealand businesses have increased by more than
77%, and the company has considerably strengthened its balance sheet.
This half year period has marked significant change for PRG as it continues to evolve its business as an investment
company in the consumer sector, managing a portfolio of companies at various stages of growth. PRG is fully focused on
businesses that are marketing to and/or dealing with consumers where it can add significant value through the
application of capital, people and ideas. It is committed to high calibre management teams, with separate boards for
each of its operating businesses.
Of particular note during the half year, PRG completed the sale of the New Zealand appliance and furniture business –
Noel Leeming, Bond & Bond, Big Byte and Noel Leeming Furniture stores – to parties associated with Gresham Private Equity Group in August
2004, for $138.5M.
PRG has recorded a gain on sale of this business of $92.2M, after allowing for sale costs. The directors were satisfied
with this outcome. In addition, the purchaser (Noel Leeming Group Limited) entered into an exclusive 10-year contract
for PRG’s Finance Group to provide consumer hire purchase funding for Noel Leeming Group, at point of sale.
The half year trading performances of the Group’s New Zealand businesses delivered operating earnings before interest,
tax and amortisation of $16.3M. This compares to the result for the same half last year of $9.2M for the New Zealand
businesses.
PRG’s Finance Group delivered a record half year profit, with PRG seeing considerable potential for further growth in
this business.
Bendon laid the groundwork for further international expansion with the signing of a global licensing agreement with
Elle Macpherson. This watershed agreement will enable Bendon to take the brand into North America and the Gulf States
early next year. Bendon’s continued focus on infrastructure improvement meant it delivered a lower than expected result,
due in significant part to unexpected additional costs and disruption associated with the introduction of a new
Peoplesoft IT system.
The Group’s investment in UK appliance retailer, PowerHouse, produced an EBITA loss of $39.2M (£13.7M) for the half
year, in line with the forecast announced in early September.
The sale of the New Zealand appliance and furniture business has enabled PRG to strengthen its balance sheet
considerably as at 30 September 2004. Equity of $127.5M compares with $73.3M as at 31 March 2004. Excluding the Finance
Group, bank loans have been reduced to $22.1M, and cash on deposit increased to $72.2M. PRG also has $63.5M of its
Secured Capital Notes on issue.
In respect of the SCN’s, PRG announced an on-market buy back programme in early September and, as at 30 September 2004,
195,000 notes had been purchased. This has subsequently increased to 574,000 notes.
FINANCE GROUP
The Finance Group, which comprises three companies – Pacific Retail Services Limited, Pacific Retail Finance Limited and
Montreal Financial Services Limited – earned net profit before tax of $14.6M for the half year. This is an increase of
150% from the $5.6M pre-tax profit recorded in the prior comparable period. It also compares to the full year result to
31 March 2004 of $14.9M before tax.
The Finance Group has been strongly focused on consumer finance lending growth, a key driver of the record result, and
this growth is expected to continue.
Further details of the Finance Group’s performance were announced to the New Zealand Stock Exchange on 24 November 2004,
as was the decision that there would be no further related party loans by the Pacific Retail Finance Limited.
BENDON
Bendon’s gross operating revenue for the half year period was $48.4M compared to $48.5M in the prior comparable period.
EBITA for the period was $1.8M, compared to $3.9M for the prior comparable period, a lower than expected result due
mostly to factors associated with the introduction of new IT systems and associated changes.
Bendon is heavily focused on the implementation of a number of specific systems and infrastructure projects that are
essential for business continuity and growth. Chief among these is the replacement of its 12-year-old IT platform. A new
Peoplesoft IT system was commissioned in August after a year-long implementation process. Disruptions associated with
the commissioning have included delays in shipping, and additional expenses due to training requirements and the fine
tuning of new systems and interfaces. Operational effectiveness is consistently improving, however the effects of the
systems change are expected to also affect the second half performance.
Revenues show a 13% growth in key brands where Bendon has a competitive advantage and capability for global growth. The
overall trading environment has been positive, despite more conservative inventory management policies adopted by major
department store customers in Australia and the UK, as well as the planned loss of some non-strategic retail customers
in Australia. Growth in key brands was offset by a decline in private label business with discount stores.
Bendon plans further expansion following the signing of the 10-year global licensing agreement with Elle Macpherson in
London earlier this month. Both Bendon and Elle Macpherson are excited about the possibilities that arise from this deal
which will see new revenues from major North American department stores from February 2005 and further revenue growth
from franchised Bendon Lingerie stores in the Gulf States. One-off expenses associated with the negotiation and
completion of this agreement and the establishment of a US-based office are being expensed into this financial year.
POWERHOUSE
As noted earlier, PowerHouse produced an EBITA loss of $39.2M (£13.7M) for the half year period, in line with
expectations. In the year to 30 September 2003, PowerHouse had only operated under PRG ownership for less than one
month, incurring a loss of $5.3M (£1.9M). PowerHouse gross operating revenue for the half year to 30 September 2004 was
NZ$267.7M (£95.1M).
In line with PRG’s investment approach of identifying underperforming businesses with potential and then investing
people, capital and ideas, we have now established a solid operating base for PowerHouse to work from. As previously
reported, this exercise has been a difficult and frustrating process, but good progress has been made. Notable gains
include the appointment of a wider senior management team, and the addressing of basic retail operational issues. The
general trends in sales, margins and individual store performance are all positive.
The markets in the UK remain competitive, and the current environment in the UK has resulted in tightening of retail
sales. Christmas trading is obviously important to the second half result, and the breakeven profit target. PowerHouse
is forecast to achieve a further improvement in trading in the 2006 year, and a full-year breakeven in the 2007 year.
PACIFIC RETAIL LIMITED
This PRG company was the owner of the New Zealand appliance and furniture business – Noel Leeming, Bond & Bond, Big Byte and Noel Leeming Furniture – which, as noted earlier, was sold in August 2004. The Group retained
trading profits for the period to 31 July 2004, which amounted to an EBITA of $5.7M. This was based on gross operating
revenue of $167.8M.
LIVING & GIVING
Living & Giving has implemented a large part of its restructuring plan during the half year and is continuing to show
encouraging signs of turnaround, with an improving underlying trading performance. Its total EBITA loss was $2.3M
compared to $1.8M in the prior comparable period. This includes one-off costs of approximately $1M related to the
closure of four stores. Living & Giving now has 11 stores and has recently completed the refurbishment of two of these.
PACIFIC RETAIL PROPERTIES
Pacific Retail Properties produced a small EBITA loss for the half year period of $0.2M. No major projects were
completed or sold during the period to 30 September 2004. The Property Group has two projects currently underway.
CORPORATE
During the period there has been considerable activity at a corporate level particularly with the sale of the New
Zealand appliance and furniture business. PRG has retained a small parent company management team, with a focus on
having a strong, autonomous management structure within each of its operating subsidiaries, supported by separate
boards.
The directors are pleased with the progress made both at a Group level and within the subsidiaries in the period to 30
September 2004. Our focus continues to be on value growth for each of the operating businesses.
At the time of sale of the New Zealand appliance and furniture business, PRG indicated that it would consider a
distribution to shareholders once the sale was complete. The directors are still working through this decision as they
finalise plans for the next financial year.
ENDS