Report Card: Where's the passion to entice investors?

Friday 25th May 2001

Clothing companies live or die on shoppers' willingness to indulge in retail therapy.

Well-delineated seasons help, encouraging customers to move from warm to cool clothing or vice versa. So do updating fashions to make existing wardrobes unwearable for those who care about such things. Also, the state of the economy and the level of discretionary spending by customers can have a significant impact.

Hallenstein Glasson Holdings mentions all these factors in its annual report but, despite a soft economy and a static winter, produced a 14% increase in net profit last year to $11.3 million, on turnover up 2% to $160 million.

Despite a strongly positive net profit, the company's net operating cash flows have slipped a fraction with a net inflow of $14.8 million against $15.4 million in 1999.

This is the third year in a row that the company has improved its performance. However, a five-year review shows it has only been clawing its way back to where it was in 1997. Its return on shareholders' funds of 34% last year is still more than half a percentage point down on 1997 and five points below that of 1996 when it made $12.5 million on turnover of $154.7 million.

Hallenstein Glasson maintains a conservatively geared balance sheet, with shareholders' funds representing 66% of total assets, and a ratio of current assets to current liabilities of 1.5. It also has a commendable, albeit ruthless, habit of boosting working capital by ensuring more than twice as much is owed to creditors as there is outstanding to debtors. Unusually, the company has no interest- bearing debt and no non-current liabilities.

These features are all important because the company carries about $11 million in stock in its store and the report says this can double at the height of summer and winter. The value of such stock can plummet if the weather, fashion trends or the economy act against a smooth sale of goods. As the report notes, "the improvement in trading margins was assisted by all chains having very good end of season clearances." Having an end of season clearance may have been simply a marketing ploy. More likely it was a reaction to overly high stock levels judging by chairman Warren Bell's comment in his report that the company "focused strongly on ensuring its trading margins were maintained and that the company did not get itself into an overstocking situation."

This is quite a sparse and traditional annual report, which is not disguised by a busy, modern and occasionally garish design. Little is revealed about the company or its strategy beyond the reporting necessities. Investors wishing to learn about the company's plans have to live with a single sentence stating that it will be "competing aggressively, and "capitalising on growth opportunities presented to it."

Despite making several mentions of the company's seven Australian stores, the company chooses not to make any segmental disclosures in its notes to the accounts. It merely states its Australian activity "is not material in the context of overall group revenue or net surplus." No indication is given of what is meant by "material‚ or when segmented figures might be given in future.

Hallenstein Glasson needs to keep in mind that investors make discretionary purchases as much as clothes shoppers. While the weather, fashion and the economy may be an influence, investors also want to be kept informed about the company's competitive advantage, growth strategy and prospects. In short, they want to know what is so exciting about the business vision that the talented businesspeople on its board and management team spend their working days striving to fulfil it.

There is little to be found on these topics in this report.

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

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