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Pacific Brands Video



 

Stock Of The Day - Pacific Brands (Expensive)

Pacific Brands (PBG) reported for an underwhelming half year results with the net loss after tax of $108.7 million owing to non-cash impairment charges. These charges, which were of the order of about $138.5 million, were experienced based on change in approach and currency depreciation. The Company conveyed that Bonds, Berlei and Sheridan brand name carrying values were not impacted though.


Group Results (Source – Company Reports)

There was a 6% rise in continuing business sales supported by 15% rise in Bonds and 14% rise in Sheridan. The opening of 13 Bonds stores along with good store growth in Bonds (up 24%) and Sheridan (up 10%) even at the time of low promotional activity helped PBG. However, the Company still faces challenges with regards to wholesale business while growth has been steered by retail. The wholesale business suffered turbulence predominantly with regards to the discount department stores. The Company reported that Continuing business EBIT before significant items was $31.5 million (down 24% on prior corresponding period), which as per PBG is in consensus with its guidance.


Underwear Performance (Source – Company Reports)

There was a slump in underwear earnings based on poor wholesale sales and margins, with total sales rising by 4.1% to $252.6 million for the half; though, performance by the retail segment has been robust. Thus better earnings were noted for Sheridan, the standout performer (sales growing 13.7% and EBIT up 5.4% pre-significant items). Further, cost savings helped in increasing the earnings for Tontine and Dunlop Flooring (sales up 1.2% to $43.8 million and EBIT before significant items up 13.8% to $2.9 million). PBG further stated that there has been a decrease in gross margins by 3.6pts to 48.5% versus prior corresponding period emanating from annualisation of 2H14 dip in underwear wholesale margins and the effect of foreign exchange, import costs, product mix and price rise. However, there was a 0.3 pts rise in margins contrasted with the 2H14 with wholesale margins and greater clearance levels balanced by the effect of an increasing retail in-store and online sales.


Sheridan Performance (Source – Company Reports)

The good points also entailed reduction of net debt from $249.1 million at June 2014 to $24.2 million. This was a resultant of factors such as divestments (Workwear and Brand Collective), working capital management and solid cash conversion of 135% from 100% in 1H14.

However, the not so good news has been relating to zero interim dividend declared by the Company for the half. The Company intended to prioritize the balance sheet strength and aims to review the dividend opportunity at the full year. The Company also reported for an increase of 5.1% in cost of doing business by $7.7 million to $158.6 million. It has been noted that the investment in retail expansion turned out to yield positive net contribution to EBIT while there was a decrease in store expenses as a percentage of sales given operational improvements.



Store Rollout Trajectory (Source – Company Reports)

The industry is dealing with a lot of pressure given the recent fall in the Australian dollar. In fact, PBG’s FY15 trading update and outlook looked feeble with continuation of challenging market conditions. The Company admitted that 2H15 results will be dependent on May and June. PBG conveyed for 2H15 EBIT (before significant items) to be up on prior corresponding period but not to outdo $31.5 million of 1H15. PBG further stated that its hedging policy may cause the average AUD:USD rate through the P&L to be c.0.892 in 2H15. The Company has clearly stated that poor foreign exchange rates are expected to impact margins, inventory balances and cash conversion from 4Q15 continuing into F16 and F17. It needs to be seen how the Company will try to act through reduction in cost of doing business, mix improvement and further price rise. The overall scenario does not look alluring in view of the earnings outlook while we also notice poor sales from few floundering brands.


Pacific Brands Chart (Source - Thomson Reuters)

We believe that the stock of EXPENSIVE at the current price of $0.455.