Report Card: Pacific Retail's faith in Bendon needs some good results

By David McEwen

Friday 6th September 2002

For some reason, many retail companies delight in demonstrating how cost-conscious they are by producing the cheapest and plainest annual reports they can.

Pacific Retail Group is different. Its latest report is stylish throughout, with graphic features and large, full colour photographs.

This reflects a confident, upbeat company and this is borne out by the prominence it gives to the year's highlights. These are led by a quote from chairman Maurice Kidd's report: "For the third consecutive year Pacific Retail Group has recorded double-digit profit growth."

The good vibes are justified. Operating profit rose in the year to March 31 by 24.1% on the previous year to $25.1 million, while revenue was up 10.4% to $444.2 million.

Other highlights it cites are the acquisition of Bendon for $39.2 million and the issue of $30 million debenture stock to help fund that acquisition.

In chief executive Peter Halkett's report, every division gets its own section Bond & Bond, Noel Leeming, Living & Giving.

After wading through the glossy pages filled with computers, furniture and digital cameras, representing the appliances on which this business was built, the reader is suddenly confronted by model Elle Macpherson in her underwear.

This icon for Pacific Retail's new acquisition, Bendon, demonstrates just how far Pacific has strayed from its core business. Some would argue it has strayed too far, given that the garment industry is so deadly competitive and margin for error so small. The culture required to run a garment business is also quite different from that of an appliance business.

If Noel Leeming Pacific's appliance flagship fails to sell a TV set this month, it can always sell it next month. But in the garment industry if your clothing doesn't fly off the shelves, it's soon out of fashion.

Investors have not been entirely convinced about the merger, given Bendon's lack of synergy with the rest of the group.

However, Mr Kidd hints that Bendon's best years are ahead of it. "Bendon is, in many respects, comparable to Pacific Retail Group three years ago," he says. "It contains a stable of quality brands which have maintained strong market presence despite a dramatic increase in competition.

"It has gone through a period of under-investment in
infrastructure and market development. The board believes Bendon will respond as well as the retail division has to its unique blend of entrepreneurial skill and administrative professionalism."

Like many but not all reports, Pacific Retail's provides a five-year review of its performance.

This is one of the most useful pages of any report and it is amazing that some companies still don't provide it.

A comparative review is important because it allows investors to identify trends in the productivity and profitability of a company. This information provides important clues to the ability of management, the state of its markets and the quality of earnings.

In the case of Pacific, the review unfolds a story of outstanding growth.

Another important page is the statement of cashflows. This has become all the more important in the light of lessons learned with the controversy in the US over profit manipulations. Investors have learned never to trust a company that claims to be producing a mountain of profit but never seems to bank any cash.

Outstanding growth is also shown in Pacific Retail's report, with net operating inflows increasing from $29.4 million in 2001 to $41.8 million this year.

This is useful because the company has taken on a big chunk of debt with the acquisition of Bendon and debt levels are fairly high.

Bendon will play an important part in continuing the company's rapid growth and the success of the acquisition will become apparent only in the current year.

The company's faith in its ability to add value to Bendon needs to be backed up with results. The new division's performance is likely to influence investors' perceptions about Pacific's ability to keep expanding.

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