Furniture & appliance retailer Smiths City Group Ltd plunged to a $7.2 million loss for the year to April although its revenue fell only 5.1%. In its result announcement on Friday, the company reaffirmed its commitment to transformation and said it would accelerate the pace of change.
The company closed 2 stores & one clearance centre this year and now operates 35 stores, including 3 clearance centres.
New Smiths chair Alastair Kerr said the pretax loss was bigger than forecast only a fortnight before the end of the financial year.
Key financial outcomes (2017 in brackets):
- Revenue down 5.1% to $215.9 million ($227.4 million)
- Pretax return down 595% to $9.9 million loss ($2 million profit)
- Return after tax down 400% to $7.2 million loss ($2.4 million profit)
- Basic & diluted earnings/share down 400% to 13.6c loss (4.5c profit)
- Net tangible assets/share down 16.7% to 80c (96c)
- Net debt:total assets 40.4% (31.0%)
- Smiths City Finance sales fell 13% to $8 million ($9.2 million) and trading profit fell 8.1% to $3.4 million ($3.7 million)
Mr Kerr said these results meant no dividend now or in the near future: “In light of these results & the need to invest in the business, the board now believes it prudent not to declare a full-year dividend. The board will continue to review its dividend policy but at present it believes the company is unlikely to resume paying dividends in the current financial year.”
Faster transformation envisaged
The programme to transform the furniture store chain began 3 years ago but picked up speed this year.
One area of change is on the board. Alastair Kerr, appointed as an independent director last December, took over from Craig Boyce as chair at the end of May. Ben Powles was also appointed in December, Antony Karp joined the board in June, Gary Rohloff resigned in April, and Sheena Henderson’s resignation took effect on Friday.
The business transformation, as espoused on Friday, includes closing off some accounting issues such as onerous leases, but the forward picture seems mainly based on opening customers’ eyes to goods in the shop on top of what they came in to buy.
Mr Kerr said online sales grew strongly – up 51% in the fourth quarter following relaunch of the ecommerce store – but the last year was mainly one of challenging trading conditions. Overall retail sales fell 4.7% to $207.9 million ($218.2 million), while same-store sales fell 2.7% to $198.6 million ($204.1 million).
“The downturn reflected a continuation of the easing in demand and intense competition in the first half. These challenges were impacted by store refurbishments & closures, election-year trading uncertainty and in some areas an insufficient focus on our customers.
“The result includes a number of one-off items including:
- the recognition of $4.9 million of provisions for onerous leases
- a $1.5 million provision related to the Employment Court’s May ruling that Smiths City must recompense staff for pre-trading sales meetings, and
- a further $0.5 million of additional contractual provisions.”
Mr Kerr said the provision for onerous leases of several underperforming stores “reflects our determination to take the difficult decisions”.
He said gearing was up but the company remained well funded. At balance date it had $6.2 million of cash on hand & net interest-bearing debt of $54.7 million, all secured against Smith City Finance receivables. Gearing measured as net debt:total assets rose from 31% to 40.4%.
“And, in contrast to recent years, and reflecting the tough trading conditions, Smiths City has recorded cash outflows of $5.8 million in the current year.”
The add-on purchases
“Priorities for the year ahead & beyond include a significant uplift in investment in the brand, technology, systems & training that will drive efficiency in the business and improve the customer experience. We will also work harder to meet customer demands and improve the customer experience in the store, online & after sale…
“If a customer comes to us seeking a bed we should also be offering them manchester & bedroom furnishings. If they come to us seeking a lounge suite we should also offer them cushions, a throw or other accessories. We need to sell a lifestyle.
“In short, the challenge before us, and it is a long-term challenge, is to make the most of the traffic through our stores by leveraging our strengths and by delivering continual improvements to the customer experience. We are determined to achieve this goal and this will see a return to growth and, over time, improved returns to our shareholders.”
Internet sales rocketing
Chief executive Roy Campbell said there had been some heartening changes: “In the 2018 financial year, as part of our transformation programme, we continued to make several important steps toward achieving that goal. We rolled out the new Live Better store livery, first with our Hastings store and just before Christmas our Auckland & Whangarei stores, and refined & rationalised our product offer.
“Our online channel, which we relaunched this year, is growing strongly. Internet sales in the fourth quarter are up 51% on the same period on the prior year and the rate of growth has continued to accelerate since launch. In the first month of the new financial year internet sales were up 80% on the prior year. The ecommerce site is demonstrating the advantage of pairing traditional retail channels with new digital channels.
“Customers turn to the online platform to compare prices across retailers and, after visiting the stores, use the platform as they discuss preferences & make purchases. We see plenty of potential to further develop the site in the coming year.
“These changes follow on the closure of our appliance-only stores, the rationalisation of group distribution & administration centres, stock rationalisation & refreshment, merchandising improvements & staff changes.
“However, the challenging trading conditions exposed our weaknesses and show we need to inject new energy into the programme and continue our drive towards exceeding customers’ expectations.”
Discounting & credit terms hit the sector
The trading loss included costs associated with the closure of stores in Riccarton, Ngauranga Gorge & the Greymouth clearance centre, and a change to the way the group manages the supply chain.
“As we signalled in April, soft demand has led to heavy discounting, often to unsustainable levels, and the expansion of interest-free credit terms to periods rarely seen in the industry. These trends were most pronounced in Christchurch & Auckland, where we operate our largest outlets and generate a significant proportion of our total sales.
“Trading at our Auckland stores has also not met expectations. The stores are now benefiting from new management & more localised marketing support. We recognise the benefits to the group of achieving a strong presence in Auckland and are intensely focused on achieving success in the country’s largest market.
“We continue to review the broader store network. This year it became apparent – despite our significant effort – a small number of stores would never generate enough to cover the lease payments, let alone generate a profit. We decided it was better to immediately recognise this in the accounts rather than letting the stores dilute the positive results elsewhere in the network. We are reviewing the future of these stores and will continue to trade them where it makes financial sense to do so.
“More positively, we have protected our margins and we have also worked hard at reducing our working capital to ensure every dollar employed in the business is working for shareholders. These initiatives have included changes to how we manage our relationship with suppliers. Inventories have meanwhile fallen to $30.2 million from $36.3 million at the same time a year ago.
“We are focused on driving traffic to our stores and growing our revenues. The simplicity of a retail proposition – delivering customers the right products in the right environment and at the right price – belies the complexity of the task in the face of changing tastes, intense competition & volatile economic conditions.”
Failed to meet own values
Mr Campbell said the company would continue to work towards refreshing the finance company proposition, including the move to the digital origination of finance applications.
As for its staff, he said Smiths City had fallen well short of meeting its own values: “In May, when the Employment Court found that we should have paid our staff for the meetings held before stores opened, it became clear we were falling short of our own values in a key area.
“In retrospect, we agree with the court. And we are complying with its order that we conduct an audit to identify any underpayments and reimburse those impacted. The audit covers all current & previous employees for the last 6 years and is not complete, but at this stage we have quantified the cost to Smiths will be around $1.5 million. We are working to finalise the exact figure and will move to reimburse all affected staff progressively over the coming months as we locate those that worked for us in the past years.
“Smiths City recognises people are a core strategic enabler of our business. Going forward, we will be placing considerable effort into training, staff development & promoting a culture that is focused on the customer and celebrates honesty, fairness, integrity & timely communication.
“In July, Smiths City will celebrate 100 years of helping New Zealanders live better, and we have reached that goal thanks in no small measure to our people building relationships with our customers, telling our story and working hard to make it a reality.
“In our next century we want our team to be proud to be working for us. We want them to feel valued by our organisation and convey that enthusiasm & excitement to our customers. Such an attitude will only strengthen the relationships that are critical to our success.”
“Muted” housing market affects outlook
“The outlook for the remainder of the year remains challenging. Trading in the first 2 months of the year has been volatile and the housing market, a key driver of demand, remains muted despite rising housing affordability. In addition to the intense competition, we are seeing spending patterns shift from consumer durables to lower-cost purchases.
“Against this, however, we expect to benefit from the positive sentiment in the rural economy. We are hopeful the continued roll-out of our Live Better store livery to the flagship Christchurch stores, the ongoing work to build brand awareness in the Auckland market and new initiatives to improve our operations will drive a better result in the current financial year.”
The board changes
Craig Boyce retired on 31 May after 30 years with the company, which started when he was appointed general manager in 1988. He was promoted to chief executive (1990-99) and finally to the chair (1999-2018).
Alastair Kerr, appointed as an independent director in December, replaced Mr Boyce as chair on 31 May.
He was appointed as an independent director of Paper Plus NZ Ltd in August 2016, Cognition Education Ltd in 2017, and has held many senior executive roles overseas in a 35-year career, including at Marks & Spencer, Mothercare, Virgin, The Body Shop, L’Oreal and Williams Sonoma Inc.
He’s chaired UK construction company J Murphy & Sons Ltd, UK department store operator Fenwick Ltd & perfume company Arran Arromatics Ltd, and been a director of brewer Fuller Smith & Turner plc. He has an MA Hons degree from Glasgow University.
Antony Karp, of Sydney, appointed in June, was chief operating officer of the ASX-listed women’s clothing retailer Specialty Fashion Group from 2012-14 and founded Sydney-based business, financial & investment consulting firm Tonka Group in 2015. He’s had 20 years’ experience in the retail, property, funds management & hotel sectors, including senior management roles with David Jones & Woolworths, Colliers & Jones Lang LaSalle in Australia.
Mr Karp was nominated to the board by Smiths City’s major shareholders Mercantile Investments Co Ltd (chaired by Sir Ron Brierley) and Sandon Capital Pty Ltd (Gabriel Radzyminski founded Sandon and is a director of Mercantile).
Ben Powles, appointed in December, is chief executive of Fishpond Ltd & WorldFront Inc, and a director of Blackball Consulting Ltd, Parisian Holdings Ltd & Parisian Neckwear Ltd, and Targetad Ltd.
Gary Rohloff resigned in April to spend more time on his personal interests after 7½ years on the board. He founded Laybuy Holdings Ltd in 2016 and was appointed an independent director of Bikes International Ltd in January 2017.
Sheena Henderson resigned in June, after 3½ years as an independent director, to spend more time on her private business interests & her other non-executive roles. She’s a director of Cluster Ltd, Moa Group Ltd, Natural Pet Food Group Ltd and Watson & Son Gp Ltd, and was previously global brand director for Fonterra Brands.
Attribution: Company releases.