NZX ANNOUNCEMENT 21.6.17 – FINANCIAL RESULTS FOR THE YEAR TO 30 APRIL 2017

Smiths City transformation underpins earnings increase
Ongoing operational improvements and a refresh of the brand & store formats are supporting the business in the face of a challenging trading environment.

Highlights

• Revenue increases 2.5% to $227.4 million from $221.9 million, assisted by rising same-store sales and the first full-year contribution from Furniture City.
• Trading Profit rose 53.8% to $2.0 million from $1.3 million with lower restructuring and abnormal items insulating the company from slower trading conditions in the second half of the financial year.
• Net profit after tax falls to $2.4 million from $5.6 million, with the prior year benefitting from a one-off gain on the sale of property and higher tax credits.
• Transformation continues with the first store to deploy the new ‘live better’ brand livery and store format opened in Hastings in March 2017 and performing ahead of expectations.
• Share buy-back plan announced as part of a drive to improve capital management and help ensure shareholders benefit from operational improvements.
• Shareholders to benefit from a fully-imputed final dividend of 2.5 cents per share, taking total dividends to 3.5 cents (fully-imputed) compared to the prior year’s unimputed total dividend of 3.5 cents.
• Strong cash flow from retail operations as a result of improving stock turn.

National appliance and furniture retailer Smiths City Group today reports ongoing operational improvements and a refresh of its brand and store formats are supporting the business in the face of a challenging trading environment.

Revenue for the year to 30 April 2017 increased 2.5% to $227.4 million from $221.9 million a year ago, with rising same store sales and the first full-year contribution from Furniture City offsetting the effects of store closures and aggressive competition in the retail finance sector.

Same store sales in the core Smiths City Retail business for the year rose 3% to $198.2 million. But growth fell away in the fourth quarter of the financial year, particularly in upper North Island markets, in line with weakening housing market sentiment and rising interest rates.

In line with guidance given at the start of this month, trading profit for the year rose 53.8% to $2.0 million from $1.3 million in the prior year. Stronger finance company earnings and lower restructuring and abnormal items insulated the company from the trading slowdown. Net profit after tax for the year fell to $2.4 million from $5.6 million. The prior year benefited from a one-off $1.8 million gain from the sale of property and higher tax credits.

Chairman Craig Boyce said: “Smiths City’s ongoing transformation is delivering for shareholders. In the face of rising interest rates and consumer uncertainty, the core Smiths City retail stores have turned in a creditable performance.

“However, the Furniture City business we acquired in April 2016 has struggled in the face of the recent trading downturn, with sales falling sharply in the fourth quarter. Additionally, the finance business, while still delivering strong earnings, has lost ground as our competitors have aggressively expanded the availability of credit.

“Over the coming months we expect to transition the Furniture City stores and five more of our leading outlets to the refreshed Smiths City ‘live better’ brand and store formats. We are also rolling out a refreshed brand livery across the store network and are working towards relaunching our finance offer to make it more competitive.

“We are cautiously optimistic that these changes will begin, in the second half of the year, to rebuild the recent momentum we have achieved in the business. Indeed, the early trading results from our new store in Hastings, the first to launch with our new ‘live better’ brand livery and store format, is demonstrating the potential of our new approach to customers to drive performance improvements,” Mr Boyce said.

BALANCE SHEET

“Smiths City is in a strong financial position. Even though we expanded our distribution footprint we have reduced total assets by $3.2 million to $133.1 million through careful management of working capital.

“At the end of the financial year our core group had cash on hand of $12 million, with all debt in the company carried against Smiths City Finance.

“As announced to the market at the start of June, Smiths City is seeking shareholder approval to distribute $5.7 million of capital via a compulsory acquisition of shares. The move is aimed at putting in place a capital structure appropriate for a well-established national retailer and ensuring shareholders fully benefit from the operational changes we are making.

“Even after the planned capital distribution the finance company, which enjoys one of the lowest loan impairments in the country, will be conservatively geared with net debt to total assets of 15%, a level more than sufficient to weather a downturn or provide for further growth.

“Reflecting our confidence in the financial strength of the business and its prospects, the board has today declared a fully-imputed final dividend of 2.5 cents per share taking the total for the year to 3.5 cents per share. Last year’s total dividend of 3.5 cents carried no imputation credits,” Mr Boyce said.

The record date for dividend entitlements is 4th August 2017 and the payment date is 11th August 2017.

SUMMARY FINANCIAL RESULTS

*Abnormal items relate to costs associated with store closures, employee and supply chain restructuring costs
** For profit attributable to shareholders (cents per share)

Chief Executive Roy Campbell said: “Smiths City is two years into a five-year turn around programme. Our initial efforts involved a refocus of the core business on an integrated furnishing and appliance retail offer, where we believe we enjoy a competitive advantage thanks to our national scale, our trusted brand, and our point-of-sale finance proposition.

“Following the closure of our last two appliance-only stores in Wellington and Christchurch at the start of the financial year, we have focussed on the revitalisation of the Smiths City customer proposition. This has culminated in the development of the new ‘live better’ brand livery and store formats.

“The new approach, which follows extensive market research, seeks to broaden our customer base, engage with our customers to determine their needs and tastes, and offer home furnishing and appliance solutions to help them ‘live better’.

“It builds on Smiths City’s long-standing reputation for offering good quality and trusted brands at a competitive price. Across our network we are delivering a more contemporary home furnishing range and a refined appliance and personal technology offer.

“At the same time, with the development of new store and online formats and staff training, we are beginning to put the products to the customer in a way that they can relate to and access easily and at their own pace.

“The success of the new store in Hastings gives us confidence in the broad strategy. The store has carved out a very strong position in the region, despite facing robust competition from local and national retailers.

“The Furniture City stores will be among the first to benefit from the new approach. Its three outlets have found the already tough trading conditions more difficult due to their single-category focus and their inability to leverage a national brand in advertising and marketing programmes.

“We are moving to correct these shortcomings with the upgrade and rebranding to the Smiths City ‘live better’ format, showcasing the full range of our offering. The Whangarei store upgrade will be completed in August of this year with the Auckland stores following suit in the coming months.

“We continue to work hard on improving how we engage, relate and retain our customers through improving our Internet and customer relationship practices. We see a vibrant future for the ‘bricks and mortar’ retail offering blended with the virtual online experience. We believe home furnishing and appliance categories are particularly suited to this ‘omni channel’ approach.

“The new approach requires the use of data to more closely provide a relevant, timely offer to our customer base. To achieve this goal, we have begun an upgrade to our information systems and we hope to begin to realise the benefits over the course of this year.”

SMITHS CITY FINANCE

“Annual trading profits at Smiths City Finance rose to $3.7 million from $3.0 million a year ago, despite revenue falling to $9.2 million from $10.3 million as the business weathered the combined effects of the recent trading downturn and more aggressive competition.

“Smiths City’s finance offer remains at the heart of the ‘live better’ approach. It allows us to strengthen our relationships with our customers and better anticipate their needs. It is also a key enabler of the ‘live better’ proposition as it makes higher-value furniture and appliances more accessible.

“However, a key focus in the coming year will be to enhance the finance business to make it more relevant and better able to compete. We are aiming at introducing an online approval process and make changes to the structure of the offer so that we cement a relationship with customers for the long-term rather than just providing finance for a single purchase.

OPERATIONS

“We have continued to take cost out of the business with working capital decreasing by $2.3 million. Inventories are down by 10.1% to $36.3 million. This reduction was made possible by a more careful and structured approach to purchasing and category management.

“As we mentioned at the half year, we have reset our buying department to a category management approach including the addition of a Merchandising Planner to the team. This position brings visibility to purchasing decisions across all categories, ensuring we are promoting products that customers are most likely to buy rather than what we have in stock.

“We see continuing opportunities to rationalise our property portfolio through optimising our store and distribution and logistics footprint. The repurposing of the Furniture City warehouse in Manukau, Auckland to service our North Island store network will result in freight savings and is a key initiative for the current financial year.

“We continue to build capability in the business. We have recently hired a new General Manager of Finance, who will drive the refresh of the finance business over the coming months. Meanwhile, we have committed to implementing training programmes across all levels of the organisation to ensure we are prepared and able to adapt and thrive in what is a rapidly changing sector of the economy,” Mr Campbell said.

OUTLOOK

“Smiths City is looking to the remainder of the financial year with cautious confidence. The market is challenging with demand for consumer durables weakening in the face of rising interest rates, and housing market uncertainty. Additionally, rural New Zealand is still recovering from the recession in commodity prices,” Mr Campbell said.

“Nevertheless, the roll out of the new ‘live better’ brand livery across our national network, the transition of flagship stores to the new format and the refresh of our finance offer will position us well to compete effectively and continue to build on the Smiths City heritage.

“We are looking forward to updating shareholders on our progress at our annual meeting in August.”

For more information:
Roy Campbell, Craig Boyce
Chief Executive. Chairman
+64 3 983 3000, +64 29 534 5508
roy.campbell@smithscity.co.nz, craig.boyce@smithscity.co.nz

About Smiths City

Smiths City Group (NZX.SCY) was founded in Christchurch in 1918 and has a proud tradition as one of New Zealand’s oldest and largest retail chains. The company floated on the stock exchange in 1972 and operates 17 stores in the South Island and 16 in the North Island trading under the Smiths City & Furniture City brands. It also operates the Smiths City Finance, and the Smiths City Commercial businesses. On the web: www.smithscity.co.nz