In one of the biggest upsets of the reporting season so far, textiles giant Pacific Brands has announced a massive $450 million loss for the 2011-12 financial year – and the resignation of its chief executive officer.
It’s a disappointing outcome for the company, after posting a $130 million loss last year. It also comes as investors are hoping retail businesses will come up with better results this year after a tough 2011.
So far, it hasn’t been so good. JB Hi-Fi posted a drop in full-year profit last week – its first decline in nine years.
Pacific Brands this morning reported an 18.1% decline in sales to $1.3 billion, and a decline in underlying sales of 4.3%.
But the news gets worse. It also confirmed non-cash writedowns of goodwill relating to its homewares and workwear divisions, to the tune of $63 million and $51 million respectively.
And in another shocking announcement, the company confirmed Sue Morphet would step down from her role as chief executive to be replaced by John Pollaers.
“I am a firm believer that five years is just about the right length of tenure for a CEO,” Morphet said in a statement. “It’s time for a fresh set of eyes and new energy to take this great company forward.”
But Pollaers will face significant challenges. Here are five Pacific Brands is up against in the next financial year.
Volatile cotton prices
Pacific Brands said its inventory costs had increased over the past year – and that’s partly because of cotton prices, which it also blamed for a decline in earnings.
Global cotton prices have declined lately due to an increase in output, but global factors – including Chinese production – mean prices may remain volatile. That will weigh on the company’s earnings.
It’s no secret small construction businesses have been suffering and now Pacific Brands is feeling the heat too.
The workwear division performed “well” over the year, but has lately been hit by a decline in sales. In fact, the business has been written down by $51 million due to what the company says is lower business confidence and a slowdown in the resources sector.
In its presentation, the company attributes this to a downturn in the SME market. As long as SMEs are feeling the pinch, Pacific Brands will be under pressure too.
The debate over private labels has been going for months, and now Pacific Brands is feeling the heat along with grocery and produce companies.
In the company’s results for the underwear division, (which saw sales down 15.8%), it mentions its hosiery line has declined “especially in supermarkets due to reduced peg space and increased private label product”.
The property market remains weak, and prices aren’t going to start rising dramatically any time soon. At the same time, benefits for first time home buyers have been reduced in several states.
This has led to poor performance in the Pacific Brands’ homewares business. Dunlop Flooring in particular, “impacted significantly in 2H12 by increased competitive intensity and slowdown in housing market”.
Overall consumer confidence
Retailers are at the mercy of consumer confidence. Pacific Brands knows this, and that’s why it just said it won’t start recovering until the overall retail market improves.
“Earnings outcomes will be largely dependent upon market conditions and associated sales performance, and may be impacted by ongoing restructuring and rationalisation.”
As many of the country’s economists will tell you, the overall consumer confidence rate doesn’t have as much to do with domestic economic strength as it does with the perceive weakness of international economies – and the possibility their problems could reach here.
That means Pacific Brands won’t see an improvement until Europe starts improving. And that could be a while.
Note: This article originally stated JB Hi-Fi reported its first loss in nine years. That is incorrect. JB Hi-Fi reported a yearly profit of $104 million this month, which is the first annual drop in earnings in nine years.
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