Pacific Brands: Buy or sell?

Nathan Bell explains whether Pacific Brands is a buy or a sell.

Here, Intelligent Investor Research Director, Nathan Bell, answers your questions.

Pacific Brands: can it pull its pants up? Is the recent CEO departure just another red flag for Pacific Brands? Could it now be a takeover target in light of recent retail consolidation, such as the takeover of David Jones?

Chief executive John Pollaers recently quit after disagreeing with the board about the future direction of the business following an internal review conducted by Macquarie Capital. This came just a month after management reduced its earnings before interest and tax (EBIT) guidance for the full-year by 15% to $90-93m due to warm weather and the general downturn in retail spending that most retailers have blamed on the budget.

Discount retailers are competing fiercely on price. Pacific Brands' margins are under pressure from large retailers such as K-Mart and Target promoting cheap home brand products. Pollaers, along with previous chief executive Sue Morphet, did a commendable job restructuring the company, reducing debt and cutting dead brands, but the company's store roll-out and international expansion plans make us uncomfortable. Both will require a major investment that the board was unwilling to support, and we'd expect the board would recommend selling the company if it can find a buyer.

While many discount retailers have been quick to blame the weather and the budget for their problems, the fact is intense competition, obsolete retail concepts and the Internet are having an impact. Pacific Brands owns some iconic brands, such as Bonds, but it's never going to be a great business.

If the share price fell below 45 cents then we'd consider upgrading the stock as a speculation given the low expectations for this business, but conservative investors should generally steer clear of the discount retail industry. As we saw with Billabong International, when a retail concept fails the end results are devastating. You can live a perfectly happy investing life without ever buying a discount or discretionary retailer.

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