Pacific Brands

Pacific Brands, as its name suggests, owns an assortment of Australian fashion and homewear brands. Own a pair of Bonds stocks? or Dunlop Volleys? They’re just a few of the company’s labels. See Table 1 for a list of the key brands.

Table 1: Key brands

Brand	Category
	Underwear
	Underwear
	Bedding
	Workwear
	Workwear
	Bedding

Results recently have been poor. Higher cotton prices, uncompetitive local manufacturing and a decision by Kmart to only stock private label products has seen earnings before interest and tax (EBIT) fall over the past few years (see Table 2). Shareholders have fared worse still due to a highly dilutive 3 for 4 capital raising at 60 cents per share cents in 2009.

A change of strategy was needed. Australian manufacturing plants have been closed, and the brand portfolio has been trimmed. Pacific Brands has also expanded its sales focus beyond wholesaling to new direct sales channels such as online and direct retail.

The recent interim results confirm that these changes appear to be working – well, at least in part. Earnings from its underwear division continue to rise, up 9.9% to $33.8m, but this was offset by lower earnings from its workwear and homewear/footwear divisions which fell 3.0% and 32.2% respectively to $18.8m and $12.0m.

The recent result highlights the dilemma for potential investors. ‘Bonds’ – Australia’s number one apparel brand according to Neilson, is well worth owning. As is Berlei and Dunlop Volleys. These brands possess pricing power and growing demand. But along with the good come the bad. And we have reservations about other brands such as Sheridan or Hard Yakka, especially in an environment where economic growth is slowing and private labels are becoming more popular.

Still, the new chief executive, John Pollaers, appears to making sound progress: debt is falling, margins are stabilising and dividends have resumed. To be sure Pacific Brands isn’t a high-quality business, but trading on an underlying EBIT to enterprise multiple of 7 and a fully franked dividend yield of 6.0% it isn’t being price like one either. We’re commencing coverage with HOLD.