Hallenstein stays consistently profitable

By David McEwen

Friday 13th December 2002

Hallenstein Glasson is one of those low-profile achievers that seldom attracts headlines, simply because there is seldom anything dramatic to report.

Investors can just about set their watches by its dividends and earnings payments, as the company is remarkably reliable at delivering moderate growth year after year. This is despite operating in the notoriously volatile apparel and fashion markets.

The company was formed from the merger of Hallensteins and Glassons retail stores in the mid-1980s. The group consists of 109 retail stores, 93 in New Zealand and 16 in Australia. These comprise Hallensteins menswear outlets (of which there are 53), Glassons women's-wear stores (43), and HBK Girl, formerly Hallensteins Kids (13 stores).

A conservative company with virtually no debt, Hallenstein has nevertheless been taking a few risks in recent years, including the concept of large-format Hallensteins stores.

These stores are proving successful and are largely in response to what the directors call, "unrealistic rental increases sought by some major mall landlords."

The biggest risk of all, however, was its expansion into Australia, where it has struggled despite all attempts to bring it into line with the performance of its New Zealand outlets.

The theme of strong growth in New Zealand, dragged down by a disappointing performance in Australia, continues for Hallenstein in its most recent annual report for the year to August 1.

"The move into the Australian marketplace is now at a pivotal time," chairman Warren Bell says.

The use of the word "pivotal" is interesting. Mr Bell doesn't elaborate as to whether this means Hallenstein would consider pulling out of Australia if things don't pick up soon. More likely he means the company has reached a turning point where it is about to generate a return on its years of sunk costs.

There are plenty of these. After opening a few test stores in 2000, the company was encouraged to expand from six to 16 outlets in Australia.

But the cost of putting in place an Australian infrastructure and an Australian management team and tougher trading conditions meant the chain performed below budget this year. This is despite a booming economy in Australia.

However, since it put in place "new initiatives" in March 2002, the board says it is beginning to see some positive results.

The crucial realisations for any New Zealand business expanding across the Tasman is that the Aussies don't need them.

Australia has a huge, sophisticated and extremely competitive business environment, especially in retailing.

When a Kiwi company, such as Michael Hill International, actually makes it there, many people are (or should be) quietly amazed.

Despite the odds, investors shouldn't underestimate Hallenstein's ability to come right in Australia. It has a good, conservative management team, which rarely gets things wrong.

While there is a reasonable chance the company will eventually crack the lucky country, it also appears it will take longer than anyone expected.

Australia was responsible for the flat performance last year, when the group's net profit was $11.4 million, a pathetically low increase of 0.3%, on sales revenue of $175 million, up 5%.

The segmented results are revealing. New Zealand revenue rose 4% to $160 million and net profits were up 7% to $12.5 million. Australian revenue leaped 13% to $16.2 million but its loss ballooned to $1.1 million from $0.3 million.

Developments during the year included the refurbishment of 12 stores, eight involving extra floor space, and the continued progress of HBK Girl, with an additional two stores planned for November 2002.

The annual report tries to calm nerves over the recent retirement of managing director Tim Glasson, pointing out his replacement, Cliff Kinraid, had been groomed during the "careful succession planning over the past few years."

It is fortunate the company has clearly prepared for the departure of one of its founders because it is not uncommon for a business to slowly fall apart after losing its driving force.

From an investor's perspective, it is commendable that Hallenstein has remained consistently profitable despite all the challenges and this can be attributed to its conservative approach.

Given its propensity for paying out a high proportion of earnings, Hallenstein appeals mostly to income seekers looking for relatively high, fully imputed dividends and this is unlikely to change.

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