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Stock Of The Day - Pacific Brands (Expensive)

In today’s daily we cover Pacific Brands (PBG), which is a consumer products company with four reportable segments (Underwear, Sheridan Tontine, Workwear and Brand Collective).  The majority of the products of the company are sold through indirect sales channels (comprising wholesaler retailer channels) with direct channels comprising direct to consumer and business-to-business sales. All products are sold through Asia Pacific region, mainly Australia and to a lesser extent New Zealand.  PBG announced its half-year results for 2015, whose main highlights were a net loss of $108.7 million and a declaration that there will be no interim dividends.

The net loss of 108.7 million was attributed largely to non-cash impairment charge of $138.5 million. However a closer look at the financials tell that the gross margins of the company declined as well as compared to first half of 2014 (from 55% to 48.5%) and the sales have increased only modestly across segments. 


Sales from continuing business increased only by a modest 6% (excluding other income and inter segment revenue), which can be attributed to retail, with wholesale sales still looking unimpressive.  Majority of the sales of the company were concentrated in Australia. EBIT from continuing business (before significant items) was at $26.7 million, which is consistent with guidance. Underwear earnings were down due to lower wholesale sales and margins, partly offset by strong retail performance. Sheridan earnings were up due to strong retail performance. Tontine and Dunlop Flooring earnings were up due to cost savings.  


PBG EBIT (Source: Company report) 

Within different brands, the Bonds sales increased from 153 million to 173 million due to growth in owned retail. Wholesales volumes were flat within this segment. Within Bonds, Babywear sales were particularly strong, especially through owned stores. Berlei sales decreased from 23 million to 21 million, which was largely attributed to a decline in wholesale volumes due to a mixed performance of key accounts and due to reduced promotions. Further product innovation and new range are planned within this brand range for the second half of year 2015. The sales of Jockey remained flat at approximately 13 million for the period. Sales were stable across all the channels for this brand. Sales of brand Explorer were also flat at 8.6 million, although wholesale distribution was up due to strong performance in supermarkets. The sales of Hosiery brands declined from 14.3 million to 9.8 million due to the affect of increased private labels.


Product Line (Source - Company Reports)

The company will be moving to a more decentralized organization model to reduce the role and cost of corporate functions and provide business units with more end-to-end accountability for performance. The company will also be simplifying its business model, and divestment of Workwear and Brand Collective was a step in that direction. The company is going to focus on maximising the potential of market leading brands such as Bonds and Sheridan. The company made significant operational progress during the period, with 13 new Bonds stores being opened. Company improved its online presentation and functionality.  That the company maintained is cost of doing business is evident from the exhibit below. 


PBG CODB (Source: Company Report) 

As shown in the exhibit above total Cost of Doing Business (CODB) decreased as a proportion of sales from 40.8% to 40.5%. Freight and distribution expenses decreased with increase in warehouse productivity improvements offsetting higher volumes, handling units and labour rates. Administrative expenses were held relatively flat due to net impact of restructuring, cost control and inflation. However sales and marketing costs were up.


Bonds Store Roll out (Source - Company Reports)

The company reduced net debt from $249 million to $24.2 million due to divestments (gross proceeds of $226 million on divestment of Workwear and Brand Collective), improved working capital management and strong cash conversion of 135%. The reduction of net debt was a stated objective of the management in the year 2015 (stated in the annual report of 2014). Improving the balance sheet strength is also stated as a key strategic objective by the management, and the company has done limited capital expenditure to maintain a strong balance sheet. Sourcing is already fully decentralized by the company.

Even if the company keeps the cost under control, it is unlikely that its sales revenues would reach anywhere near the five year high of 2010. The long-term trend of revenues has not been encouraging, and the management has not given any clear indication when it will turn around. 


Income + Cash Flow (Source: Company Report) 
 
The company is currently trading at a price of $0.420, at a dividend yield of 4.88%. At this price stock is trading close to its 52 week low of $0.387. In managements own words the market is challenging and the business has seen many difficult years.


PBG Daily Chart (Source - Thomson Reuters)

Although the company has maintained its cost under control, the growth in sales remains sluggish and the company’s NPAT remains negative. Strategic improvement processes while implemented are yet to translate into significant financial numbers. Thus we believe that the stock is expensiveat the current price of $0.415.