Pacific Retail Group CEO, Peter Halkett

Friday 21st December 2001

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Peter Halkett update's Big Byte's trading position, talks about future growth and appraises the company's share price.

SC Investor: Although PRG's revenue is steadily increasing, margins appear to be stagnating. How can PRG improve margins or which programmes are already implemented to achieve this?
Peter Halkett: Firstly, I don't expect Appliance margins to improve given the competitive nature of the market. However, by continuing to reduce operating costs, expanding our Finance Company, entering new high margin categories e.g. Living & Giving and maintaining overall sales growth, profit as a percentage of total group turnover will steadily rise.
SC Investor: How do you rate the start of the Big Byte stores? Are you satisfied with the new concept and how many stores do you plan to open in 2002?
Peter Halkett: Big Byte is already trading at a level close to break-even point, despite a market wide slump in PC sales. Not bad for a new brand after only 3 months. A large amount of future growth in the appliance/consumer electronics sector is expected to come from digital, computer and Internet related products and services, therefore Big Byte has been developed and positioned accordingly. We aim to have about 8-10 Big Byte stores nationwide, however timing is ultimately determined by site acquisition requirements. I expect we will open 2-3 stores next year.
SC Investor: There is not a lot of disclosure regarding the PRF division. The Arthur Andersen report seems to suggest that the Finance Division would need further capital for growth. Can we expect a detailed report about the Finance Division in the next annual report? Were do you see the opportunities for PRF? Wouldn't it be better to spin off PRF as a separate listed company?
Peter Halkett: Historically PRF has simply provided Hire Purchase to the Appliance business, however earlier this year the board signed off a proposal to significantly expand the Finance business. PRF will grow 3rd party financing (providing hire purchase to other big ticket retailers) and also increase its range of finance offerings to include personal loans etc. A direct sales channel starts operations February 2002 and we will concentrate on existing database opportunities. As part of the plan an ongoing debenture offer to the public has been put in place to fund finance contracts and agreements that don't currently meet the specific criteria of the securitisation vehicle. As a result of the expansion reporting detail will be increased. Finally, currently 90% of PRF revenue is originated via the appliance business therefore spinning off is not appropriate for the foreseeable future.
SC Investor: What sort of growth profile is the PRG board looking to achieve over a 5-10 year time frame? What sort of long-term initiatives are you looking to implement to ensure the excellent growth rate of PRG is sustained?
Peter Halkett: We already have quite a few initiatives underway to maintain growth. For example, Finance Company expansion, Big Byte, Living and Giving, larger Noel Leeming and Bond & Bond stores, and Internet sales. In addition we are well positioned and funded to take advantage of other opportunities as they arise - we are actively pursuing suitable retail acquisitions.
SC Investor: Does the company have any plans to expand into Australia?
Peter Halkett: No, but anything is possible - I wouldn't like to completely rule out this option.
SC Investor: PRG has not paid out a dividend to strengthen the balance sheet for further acquisitions and/or improving floorspace. Shareholders have also approved the issue of 15 million new shares. So far the expenses regarding new stores (L&G, Big Byte, etc.) seem not to be close to retained profits. Do you think it is still acceptable for shareholders to forfeit a dividend if all other listed retail stocks in NZ do pay out dividends?
Peter Halkett: The board is confident that investing in current and potential growth opportunities will deliver greater shareholder value than paying a dividend at this point in time. The improved performance over the last 18 months would support this approach.
SC Investor: Do you think the financial forecast outlined in the Arthur Andersen valuation is valid? If not, why not?
Peter Halkett: Yes, I believe the AA forecast was fair and was based upon management information.
SC Investor: As PRG's business trading has improved enormously over the last period why do you think this has not been reflected in its share price?
Peter Halkett: Lack of liquidity, controlling shareholder with 73%, lack of dividend payout and a legacy of over promising and under delivering.
SC Investor: Why do you guys do so little PR and promotion of the stock when the business is doing so well?
Peter Halkett: Given our previous poor track record for meeting our financial commitments, at this stage of our turn-around, in the main we prefer to let the results speak for themselves.
SC Investor: Why do you think the share price is so low in comparison to Michael Hill/Briscoes/Warehouse?
Peter Halkett: Refer Q 8 above.
SC Investor: Are you going to get out and do some promotion so the share price will reflect the valuation ascribed to in Arthur Anderson's report?
Peter Halkett: Refer Q 9 above plus our recent interim result has been widely reported and positively received by the market. In addition, the linkage with the AA valuation report was noted by several media commentators.
SC Investor: How much money has PRG taken in its finance company?
Peter Halkett: As at 30 November PRF had raised $13.2M (in approx 16 weeks) from the debenture offer.
SC Investor: What is the money that PRG is raising in its finance company to be used for?
Peter Halkett: Refer Q 3 above.
SC Investor: Would it not be cheaper to raise funds under your securitisation programme rather than going to the public?
Peter Halkett: The securitisation structure is still in place and operates for most hire purchase agreements however as mentioned in Q 3 above not all financing activities can be funded via the existing arrangement.
SC Investor: How has the increase in cheaper South Korean-based appliances affected margins in your appliance stores - for better or worse?
Peter Halkett: Little impact, if any. I presume you are aware we now source the same basic products at similar prices from Thailand and China. In addition, we have now introduced (on an exclusive to PRG basis) Kelvinator and Mitsubishi whiteware so our overall whiteware offering is stronger than ever! This should mean higher sales and margins.
SC Investor: Department stores seem to be coming out fighting after years in hiatus, extending opening hours and introducing strong discounting policies. Do you see these retailers as a threat or are you confident that specialisation, which is what your company is founded on, remains the way to go in retailing?
Peter Halkett: As you say, certain department stores have been on the back foot for a couple of years now. This appears to be a worldwide trend as department stores get squeezed in-between the discounters at one end e.g. Wal-Mart, Warehouse types and the specialists like us at the other. I don't believe discounting is the long term solution for middle market department stores, although, as they find this out they will make it tougher on their competitors at the same time as reducing their own profits even further. In my opinion, true department stores don't have a sufficiently low cost structure to profitably position on price. (A similar situation to the recent airline industry dramas) Without wanting to become over confident or complacent specialists have a genuine and sustainable point of difference, if executed correctly - width/depth of range, expertise, focus etc therefore I feel PRG is well equipped to defend our patch against the general merchandise retailers.
SC Investor: Why do you often have two competing appliance outlets i.e. Bond & Bond and Noel Leeming in one mall? Wouldn't it be better to just have one store there?
Peter Halkett: This is not a straightforward answer. Firstly, and not really the point of your question but we are progressively moving NL and BB out of malls - too expensive for the size of store we require. We run to two appliance chains because we can achieve much greater market share than we could with just one. The additional costs of running two chains is more than justified by the extra sales and scale benefits plus if we didn't operate say BB someone else would. Our stores are often in close proximity because we want our stores to be in the best possible retail locations and in many situations there is no feasible alternative within a defined market catchment. Our research shows appliance buyers visit 3.5 shops before they buy therefore clusters of similar stores types are proving popular with consumers. To separate our stores and put one chain in a less than desirable location simply limits our potential. Grouping our stores actually creates a destination and can therefore isolate our competitors. Take Wairau Park in Auckland as an example, it is arguably NZ premier big ticket shopping destination - if you're not there you will miss out on a lot of business.

ShareChat thanks Peter Halkett for taking part in this Investor Interview.

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