Special Report: The Fashion Stakes

By Phil Boeyen, ShareChat Business News Editor

Friday 4th May 2001

The sharemarket is a fickle creature. So is the world of fashion. Add in the vagaries of the weather and it makes the idea of a listed fashion company look like plain hard work.

For a pure fashion play in the New Zealand market investors have only one choice - Hallenstein Glasson (NZSE: HLG).

Despite names that are historically old, the company has dragged itself into the new millennium with an edgier advertising campaign and moves across the Tasman.

Although New Zealand companies with exposure to Australia have had their share of bad press recently the Australian expansion is important because that is where the growth potential lies.

The company says it is beginning to pick up 'critical mass' across the ditch in the form of five Glassons stores in Sydney and five in Melbourne.

Another store is due to open in Melbourne and a small distribution centre is up and running in Sydney. There are also two Hallensteins stores in Melbourne.

The group recently appointed a general manager to oversee its Australian women's stores - another sign that it's serious about Australian expansion.

Trying to get detail about the Australian stores' performance though is a little tricky because the company doesn't release geographic breakdowns of its operations.

Nor does it offer revenue and profit breakdowns of its three retail brands - Hallensteins, Glassons and HBK.

Ask chairman Warren Bell how the Aussie operations are going and he gives the guarded reply that the company is "reasonably happy to date" with its performance there.

However he's not into revealing sales or profit breakdowns, probably understandable in an area where competitors are as keen as investors to get their hands on such information.

Mr Bell does say that, like many Australian chains, the stores have felt the bite of the retailing downturn

But if Australia is the growth story it's still New Zealand that provides the company's main revenue and it's worth looking at the three retailing brands individually to try to get a picture of the whole.

The star may as well get first billing and that is the company's 27-store Glassons chain, which seems to have hit the right note in terms of market appeal and price.

Clothing in the stores is not aimed at any particular market segment but more at women with a "youthful outlook", and one of the secrets to the chain's success appears to be its ability to marry stock control with fashion sense.

It's estimated the chain sources between 60% and 80% of its clothing in New Zealand, which means lead times to manufacture the garments can be as little as three weeks.

This gives the chain the ability to re-order stock that is selling well in a season, unlike competitors who get much of their stock from overseas where much longer lead times.

Glassons too has a quirky approach to advertising, which seems to appeal over a wide age group.

Unfortunately the edgier approach has not been as successful for the 47-store Hallensteins brand, which is understood to account for around 40% of New Zealand revenue.

One analyst says the company got it wrong when it tried to restyle the brand a couple of years ago and although it may have attracted younger customers it also alienated older clientele.

"They appear to be winning some of the customers back, but in many ways they are still playing catch-up from a poor winter season in 1999.

"What they are now trying to do is be more fashionable, but they realise that they can't afford to lose their established market either."

Part of the problem could be the name. Long-lived brands can be a bonus for company marketing itself as part of the establishment, but it's not much of an advantage when trying to appeal to younger clothes buyers.

One way the company is looking to boost the brand is through a larger format concept, which it's opening at the new $180 million Botany Town Centre in Auckland.

Billed as a showcase for New Zealand retailers, the site covers 17 hectares south-east Auckland with a mix of large format stores, an enclosed mall and a High Street-style, outdoor shopping precinct

Warren Bell says the advantage of a larger Hallensteins store is that it can offer a wider product range and become more of a retail destination in its own right.

That product range has been boosted in recent times with the return of boyswear to the Hallensteins stores.

Although the company tried to appeal to both sexes with its 13-store HBK brand, it seems that boys in the target market of 6-13 year olds weren't too fussed on shopping with the girls.

All the HBK stores now stock only girlswear, but once again the company is not giving away any details on how well they are doing - or not doing.

In terms of finances, HLG has been holding its own, but not spectacularly.

In the half-year to the end of January the company reported a slightly higher half-year profit of $5.96 million compared with $5.91 previously.

Looking at annual figures, profit per share has been slowly clawing its way back from 16.32 cents per share in 1998 to 19.48 cents per share in the year ended July 2000. However its still below the 21.56 cents per share the company delivered in 1996.

A real positive is that, given the competitive nature of the industry, HLG has managed to grow gross profit margins.

In the summer just ended the figure hit 43%. While that is only a touch above last year's 42% it's considerably better than margins in the mid-30% range it was achieving several years ago.

Rentals are a concern though and the company hasn't been shy about complaining that there is ongoing pressure from some of the major mall landlords for unrealistic levels of rent increases.

"This cost pressure is the major area of concern for the group, and continues to require substantial executive input, well beyond what we would like," Warren Bell told the company's AGM.

It's understood rentals as a percentage of revenue have increased from around 5% in the mid-90s to around 8% today.

So where to for the company now?

With a reputation for being conservatively managed - and even more conservative about giving away information about its operations - it's not surprising that chairman Warren Bell isn't going to make any flash statements about the future.

"We plan to keep pushing quietly ahead in an orderly fashion," he says.

Unfortunately for the market that doesn't offer a lot of insight.

One analyst bemoaned the fact that the company doesn't tell the market enough about what it's doing.

"When the company appointed David Young (former CEO) he brought a new edge to the company, not only in terms of lifting the retail stores profiles but also in releasing information to the market and keeping it more informed.

"The market gave the company a big tick for that, but since he left for personal reasons the company appears has retreated to a closed shop environment which leaves the market guessing.

"We get a few snippets at the AGM and when the financials are released but not much else."

In many ways the health of a fashion company is dictated by three things - the economy, the weather and fashion sense.

Hallensteins Glassons doesn't have any control over the first two factors, so profit is dependent on buying and promoting the right stock at the right price and keeping a control on inventory.

With the New Zealand market at maturity for the company - "there's probably room for a couple more Glassons stores but not much more" says one analyst - HLG currently falls into a low-growth stock which yields a tidy dividend.

It will continue to be measured in success locally on whether people are out buying clothes or spending their money on other things.

Warm autumns and cool springs don't help sales because if people haven't bought early in the season they often put off purchases until the next season.

There's also the danger of increased competition here.

Listed Australian retailer Millers is the fashion darling of ASX. It has opened around 265 stores in Australia in the past nine years and is aiming at 500. The stock has been constantly rerated for exceeding profit expectations.

Millers has moved into New Zealand as well and although it's a low-cost retailer aimed at an older market than Glassons, it has introduced a Crossroads chain that is aimed the under-35 female market with a target of up to 250 stores across Australia in the next few years.

Still it would be wrong to label Hallenstein Glassons as a no-growth stock just because the local market is mature.

There has been some indication that it could be looking to hold onto more of its profits to expand its business.

In its half-year announcement it said, "the directors would like to emphasise that their future recommendations as to dividends will continue to be based on the trading performance and financial strength of the company, and any growth opportunities it may be evaluating."

As mentioned earlier, the best indicator for the future will be to watch progress in Australia.

If the company can continue to grow outlets there in a profitable way - and hopefully the market will be provided with a geographical profit breakdown in the not too distant future so it can judge for itself - it could become a growth as well as a yield stock.

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