McInnes trims the fat and comes out on top

By focusing on the direction online retail is headed, Premier Investments' Mark McInnes has delivered a solid performance in an environment that has seen other retailers struggle to survive.

It may have been largely cost-driven but the Just Group performance within Premier Investments’ results again highlights just what a good and adaptable retailer Mark McInnes is.

And while, depending on whom you listen to, McInnes was responsible for the initial withdrawal of David Jones from the online retailing space it is now evident that Just Group has embraced, not just online platforms but the implications of the growth of online retailing for the rest of the business.

He may have been a late-ish convert to e-tailing but Just Group is well down the track of reconfiguring itself for a different retail environment.

The headline number was impressive. Within a Premier profit that rose 68 per cent to $68.2 million, Just Group’s underlying earnings before interest and tax were up 23 per cent, with second-half EBIT up 130 per cent.

In an environment where its fellow-retailers have been reporting significant profit declines and are uncertain about their prospects, Just Group’s results are an aberration.

The result was cost-driven. Just Group’s sales were down 4.3 per cent and were 6.7 per cent lower on a comparable stores basis. McInnes carved into salaries and advertising and marketing but was also able to reduce rents by 0.3 per cent.

The attention to costs helped drive a 99 basis point increase in gross margin and an impressive EBIT-to-sales margin of 9.7 per cent, up 216 basis points on the prior year.

One of the convictions McInnes has reached is that the growth of online retailing will force a restructuring of physical store networks and their relationships with landlords fixed on annual rent increases regardless of retail conditions or changes to the industry structure.

He has been busy closing unprofitable and sub-economic stores, having tough discussions with landlords as leases expire and convincing landlords to provide capital for new stores.

While retailers (including McInnes) rail against the duty and GST-free status of online purchases of less than $1000 offshore, the high cost of retail space, along with labour costs, are the key factors that render local retailers uncompetitive on price with online retailers.

McInnes’ team have also been realigning rosters and negotiating productivity improvements to improve the economics of the physical store network, along with a host of other efficiency measures and an increased emphasis on buying and sourcing.

Just Group today is a leaner and more flexible group than it was and ought to be leveraged to any improvement in the retail environment. Encouragingly, it said today that total sales and comparable store sales for the year-to-date were both ahead of the same period previously.

If the result were just about costs Just Group would eventually flat-line or go backwards. McInnes inherited a portfolio of proprietary brands, including two star brands that he can leverage, and is leveraging, both in the traditional retail space and online as well as a number of brands that were struggling.

The brands that were to varying degree impaired – Portmans, Jay Jays, Jacqui E and Just Jeans – are all, Just Group says, generating stronger trading in the early months of this financial year. Portmans, which has had some very poor years, was finally profitable last year. Just Jeans improved through the second half and Jacqui E and Jay Jays are showing some signs of improvement. Their store networks are still being overhauled/shrunk as leases expire.

The two growth brands – Smiggle and Peter Alexander – increased sales last year by 14.4 per cent and 17.1 per cent respectively and their store network is expanding rather than contracting.

McInnes is particularly excited about the potential of Smiggle. There are already 13 Smiggle stores in Singapore producing an "exceptional" performance and Just Group plans to not just continue to expand in Singapore but to take the brand into Malaysia and Japan next year.

The longer term aspiration for Japan, a very sophisticated retail market, is to have up to 200 stores within a decade. In Malaysia the group plans to open 25 to 35 stores within three to five years.

Peter Alexander launched in Singapore in May as an online offering but Just Group is examining a flagship store opening next year.

Both those brands are exclusive – no-one else has access to them and therefore no-one can under-cut Just Group on price – and are therefore peculiarly suited to a "bricks and clicks" strategy. If Just Group is right about the Asian opportunity – and the Singapore experience provides some reassurance – there is a substantial growth opportunity for those brands offshore.

McInnes is pushing hard more broadly into online retailing. It has used its Dotti brand to create an online template and says has been an "outstanding success" and the format developed for that brand will now be rolled out to the rest of the portfolio. Already all of its brands and their SKUs are online.

McInnes plans to continue to invest in building the online presence, where sales grew 67 per cent last year albeit off a small base. His aspiration is to build online sales to 10 per cent of group sales, which is not an outlandish target given the experience of established retailers offshore.

The broad strategy makes sense. To prepare for the continuing growth of online retailing and its impact on traditional store networks it isn’t sufficient to create a compelling online presence, although that is a must.

It is also necessary to continually reshape the physical network and continue to push hard to continually reduce its cost base to reflect the shift in volume to the new channel.

The other big asset as the industry structure evolves is proprietory brands. Just Group owns all its brands, a major advantage.

Other retailers, particularly Myer and David Jones, are moving quite quickly to lift their ownership of brands to insulate themselves from price and/or range-based online competition in the knowledge that while online retailing in Australia is still in its infancy (it’s less than six per cent of retail sales) it, and the threat it poses to traditional retailers, is growing rapidly.


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