SFG gets boost from rental cuts
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."
Frequently Asked Questions about this Article…
Specialty Fashion Group (SFG) says landlord rent reductions are a useful indicator of the retail outlook. The group is getting discounts of about 15–20% on lease renewals and new stores, and CEO Gary Perlstein notes you only see those cuts when market conditions are weak — so lower rents have helped SFG’s cost base and point to continued pressure in the retail sector.
SFG reported sales revenue of $119.7 million across 892 stores (up 2%, partly due to an extra week of trading). The company expects net profit for the six months to December 31 to be in the $17–18 million range, compared with $6.2 million in the prior first half.
SFG attributes the near‑trebling of first‑half profit to lower rent costs, supply‑chain efficiencies and higher selling prices for its clothing. The company also said it pulled ‘‘all the levers within our control’’ to achieve sustainable improvements.
SFG’s gross profit margin improved by 477 basis points to 62.4%, with a further 150 basis‑point improvement expected in the current half. The share price has doubled since October, spiking as much as 47% to a high of $1.03 before closing at 97¢; Deutsche Bank raised its price target to 95¢.
Despite the strong first‑half profit outlook, SFG has chosen not to give earnings guidance for the financial year. The article says the company remains cautious because economic uncertainties and structural changes in retail have not gone away.
Views differ: JP Morgan warns that cyclical and structural issues will continue to affect the retail sector, citing rising unemployment and cost‑of‑living pressures and a breakdown between disposable income and retail spending. By contrast, Macquarie Group said conditions are improving, noting clothing and footwear volume growth returned in March 2012 and is expected to be maintained across 2013.
Noni B engineered a surprise profit upgrade in January that doubled its share price over the past year, but later disappointed the market with an earnings forecast about 30% below the prior first half, which knocked the stock. That episode highlights how quickly retailer valuations can move on profit upgrades and downgrades.
Based on the article, investors should monitor rent and lease negotiations (landlord concessions), gross profit margins, supply‑chain improvements, pricing power, sales volume trends (watch for calendar effects), company earnings guidance, analyst price targets, and macro headwinds like unemployment and cost‑of‑living pressures that can affect consumer spending.
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