Bendon bares all though directors send odd signals

Friday 3rd August 2001

Fashion companies are expected to innovative and trendy. Bendon Group has followed tradition and produced an annual report that at first glance looks like a lifestyle magazine.

It has a half-size format, fancy stitching, a headline reading "Poise," a close-up of Elle Macpherson and even a mock bar code on the cover.

Inside, however, the company is all business with a no-frills design that demonstrates its commitment to cutting costs.

Bendon needs to trim costs because its core New Zealand and Australian undergarments markets are showing no growth.

It says its first year as a non-domestic manufacturing company, with all products now sourced from markets with cheaper labour, was "the correct decision" because it allowed the company to remain competitive despite depressed retail markets.

However, the move appears to have had some negative effects as well as elsewhere in the report a $445,000 exchange rate loss is shown from its apparel businesses.

Despite minimising costs (without compromising the quality of its products and brands, it stresses) it points out that growth from its home markets will be hard to come by. "The directors believe that further market share growth in both companies will be difficult and we are looking to new opportunities in the UK."

While the size of the UK market might be appealing, it is hard to believe it will be any less competitive than Australia. Bendon has a 25% market share there, well down on the 50% it claims for New Zealand.

Setting up in the UK is expensive and $1.2 million was spent last year in market research and just getting noticed by retail chains.

The company has been conservative in writing this cost off as a non-recurring item when there is a case for arguing it could be capitalised as an investment that will produce future benefits. First deliveries of the Elle Macpherson Intimates range are due in stores within a matter of weeks and the success of the venture may not become apparent for some time.

Another area where Bendon has exercised commendable conservatism is in brand valuation. While many companies record their brands as perpetually valuable assets, Bendon is amortising the value of its brands over 15 years. This could result in the company understating its assets as the lifespan of brands is likely to be considerably longer.

Meanwhile, the company has still to record its first full year as a solely apparel company. It sold its ceramics business, New Zealand China Clays, last June for a net profit of $28.4 million, which has boosted its net profit to $23.3 million from a net loss of $1.4 million last year. Following this sale it changed its name from Ceramco Corporation.

Sensibly, the company has divided its earnings at the front of its annual report into apparel and discontinued activities. This will avoid confusion, more so next year than this when a substantial decline in net profit will be reported.

The remaining apparel assets delivered earnings before interest and tax of $5.3 million this year, a 14.5% decline on 2000. This fall comes despite unchanged sales of $78 million, indicating margins have come under intense pressure.

Incidentally, the sale of China Clays has reduced the salary burden significantly. A year ago, the group recorded 17 staff earning $100,000 or more per year. At March 31 this year, it had a mere seven.

One area where the company deserves a brickbat is for allowing a gap between its words and actions.

Chairman Ian Parton concludes his review by saying "Bendon has an exciting future ahead of it and as a board we look forward to sharing this future with our shareholders." Yet, just three pages later, a list of directors' share dealings shows five directors, including Mr Parton and managing director Hugo Venter, exercised large parcels of options and sold all the resulting shares, making tens of thousands of dollars in profit. Only one director bought shares during the year and three out of five, including Mr Venter, own none.

Directors are perfectly entitled to exercise options and sell shares, but buying or retaining none hardly sends out the right signal to investors.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Internet: www.mcewen.co.nz Email: davidm@mcewen.co.nz

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