SFG gets boost from rental cuts

IF YOU want a clearer picture on the outlook for Australia's retailers, a good place to start is what their landlords are charging for rent, says Specialty Fashion Group's chief executive, Gary Perlstein.

IF YOU want a clearer picture on the outlook for Australia's retailers, a good place to start is what their landlords are charging for rent, says Specialty Fashion Group's chief executive, Gary Perlstein.

The group is getting discounts of 15 to 20 per cent on lease renewals and new stores it is looking to open.

"You don't get these rental reductions if everything is going well in the marketplace," Mr Perlstein said.

It is why the womenswear retailer is not offering any earnings guidance for the financial year despite sending its shares soaring on Friday with the announcement it expects first-half profit to nearly triple despite flat sales.

Lower rent costs, along with supply chain efficiencies and higher selling prices of its clothing, were some of the factors that helped the group defy moribund trading conditions, which were not expected to improve any time soon, according to Mr Perlstein.

Sales revenue in the group's 892 stores was up 2 per cent to $119.7 million, although the increase reflected an extra week's trading for the December half, compared to the prior period.

"The economic uncertainties and structural changes affecting retail have not gone away, but we have pulled all the levers within our control to achieve sustainable improvements and our results reflect this," Mr Perlstein said.

The owner of the Katies and Millers fashion stores expects net profit for the six months to December 31 to be in the $17 million to $18 million range, compared to $6.2 million for the prior first half.

Specialty Fashion Group said its gross profit margin improved by 477 basis points to 62.4 per cent. A further 150 basis point improvement is expected for the current half year.

The shares have now doubled since October last year after jumping as much as 47 per cent during trading on Friday to a high of $1.03 before closing at 97¢.

Deutsche Bank raised its price target on the stock to 95¢ on Friday, saying the result "reflects company-specific factors including supply chain initiatives, as well as a generally reasonable Christmas trading period for specialty apparel".

Another women's fashion group, Noni B, engineered a surprise profit upgrade last January that led to the share price doubling over the past year. But the stock took a battering on Thursday after it disappointed the market with an earnings forecast 30 per cent below the prior first half.

JP Morgan says cyclical and structural issues will continue to affect the retail sector this year.

While local consumers are "well positioned" compared to their international counterparts the broader picture is mixed with rising unemployment and cost of living pressures to remain challenging despite falling interest rates, JP Morgan said.

There were also structural issues such as the breakdown in the relationship between net disposable income, consumption and retail spending. Income growth is leaking into debt repayment, online and international travel.

But Macquarie Group said this week that conditions were improving for retailers.

The "collapse" in volume growth for clothing, footwear, accessories and departments stores in 2010 had finally eased, it said.

"Volume growth returned to the categories in March 2012 and we expect current growth rates will be maintained across 2013."