SMITHS CITY MAINTAINS SAME STORE RETAIL SALES LEVELS 22.12.15

The Directors of Smiths City Group Limited, the Christchurch based retailers, have announced an operating surplus after taxation for the six months to 31 October 2015 of $2.555million compared with $4.266million last year with both period results affected by extraordinary items relating to the Christchurch property as well as “one off restructuring” costs in the year.

Operating revenues for the six months were $106.248million – a decrease of 2.9% on the previous half year.

The Directors have declared an unimputed half year dividend of 1.0cent per share (last year 1.0cent) to be paid on Friday 12 February 2016.  For the purposes of the dividend the share register will close at 5.00pm on Friday 5 February and reopen at 9.00am on the Tuesday 9 February 2016.

The summary of consolidated results is as follows:

Note 1 – included in trading profit is a gain on the sale of the Colombo Street property of $1.8million.  Secondly, trading profit includes restructuring costs of $1.4million.

Note 2 – in  2014 other income includes insurance proceeds of $2.875million received for the Colombo Street property.

Note 3 – the deferred tax charge for the current period takes into account temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes as well as the company’s estimates of future taxable profits on the basis these can be offset against the tax losses available.  Smiths City has available carry forward tax losses of $7.0million, hence no income tax is payable.

DIRECTORS REVIEW

 Commenting on the result Chairman Craig Boyce said “The Board was pleased to complete the sale of our “flagship” Colombo Street store in October 2015 for $19.6million nett of costs and book a profit of $1.8million before tax on the sale.  This allowed the Group to repay all bank debt (except that required in the Finance company) and put us in a strong Balance Sheet position to grow the retail business for the future.

The company also commenced, during this six months following the appointment of CEO Mr Roy Campbell on 1^st May 2015, a major restructuring of the business to improve results and prepare the company for growth. This will continue over the balance of the financial year and is outlined in more detail in the Chief Executive’s Review to follow.

In particular the restructuring so far has been in the following areas:

Rebrand all retail operations as “Smiths City” by absorbing the sub brands Powerstore and L V Martin to simplify the merchandise and promotional activity.

• Eliminate loss making parts of the business and reduce costs.
• Review the buying and logistics operations.
• Plan for the outsourcing of the Alectra appliance service operations.
• Revitalise our promotional and media offering as well as our consumer finance products.

When these matters are adjusted in the first half results, the trading results are improving and ahead of last year as outlined in the financial detail.

We were pleased to maintain our sales broadly consistent with last years level on a “same stores basis” after adjusting for the unprofitable Powerstore and L V Martin stores that have been closed.

Demand in some areas of the South Island has definitely been affected by the reduction in dairy and sheep farm incomes but that has been compensated for by better trading in the North Island in our stores in Wellington and the Bay of Plenty regions.

We are looking ahead with more confidence as the changes already made and planned are intended to improve retail profitability through higher margins and lower costs. There is ongoing review of many areas of the business which will further strengthen our market and customer proposition and profitability.

There will be further restructuring costs as action is taken to address areas which have held us back but these are necessary and “one off” and should be largely completed this financial year.

We also look forward to a considered entry into the Auckland market through the acquisition of an existing profitable business early in the next financial year.”

CHIEF EXECUTIVE’S REVIEW

Smiths City has traded successfully over the past six months.

We have, despite the overall slowing of the New Zealand economy, held revenue levels at the same levels as the prior year on a like for like store basis and experienced margin improvement.  In October we opened our latest store in Taupo, adding a further 2,000 sqm of retail to our existing 63,000 sqm, clearly signalling our intent of expanding in the North Island.

Margin improvement resulted from our focus on execution at store level.  In addition, over the past six months we have undertaken a number of significant initiatives with a view to improving our profitability and productivity.  These can be viewed from both infrastructure and human capital perspectives, forming an integral part of our overall strategic review of business operations that has been conducted over the past six months.

The review comprised a full and comprehensive assessment of all aspects of our business including, but not limited to, our purchasing and supply chain practices.  As a result we have adopted a cloud based logistics platform that will enable complete visibility over our supply chain, facilitating better decision making around inventory and reducing the compliance cost of managing the relationships between ourselves and our suppliers.  The integration of the platform will be complete in March 2016 and we will see benefits flow from this date.  The implementation of this system enables Smiths City to refresh its logistic platform in a cost effective manner.  We are currently also reviewing proposals to provide a fully integrated warehousing management system.

From a market facing perspective we have realigned our brand portfolio from three brands to one, with the closure of our Powerstore operation and the rebranding of L V Martin in Wellington to Smiths City.  This brings both economies of operation and consistency to our national advertising.

Concurrent with the rebranding we have recognised the need to enhance our marketing and communications activities.  We have altered our mix of marketing spend to reflect the changing media consumption patterns of consumers.  We have also commissioned Colmar Brunton to undertake an in-depth market research program that will inform us how to best present our offer to our customer base.  We expect the results of the research early in 2016.

One of our core strengths is the diversity of our range allowing us to offer a compelling retail solution to the New Zealand home owner.  Our buying team are in the process of conducting a complete review of our product portfolio to ensure the relevancy and currency of our product range.  We continue to develop our revenue streams from our furniture and bedding offering.  We have also enjoyed strong revenues from our Consumer Electronic division via focusing on the more premium end of the market and leaving the commodity market to others.

Our finance offering continues to deliver satisfactory results; it is, however, of note that consumer finance has become intensely competitive and price sensitive and is also experiencing increasing levels of legal compliance required.  As a long standing finance provider we welcome these levels of increased compliance.

Recognising that our success is dependent in no small matter on the quality of the people we employ, there has been a number of changes in the executive team at Smiths City.  We have engaged a Human Resource Manager to ensure that we achieve best practice in the management, motivation and development of our team.  We have also appointed a new Marketing Manager with specific competency in the digital and CRM areas.  We are currently also finalising the appointment of a Category & Logistics Manager and we have also introduced the position of National Sales Manager.  With the completion of these positions Smiths City will have a substantially new executive team leading the business in the new year.

Turning to the trading environment we believe it will continue to be challenging.  Accordingly, we do not see significant market growth in the sectors we operate in the near future.  Improved returns for Smiths City will come from improving market share, accessing new regional centres where we are not currently present and the benefits flowing from improved operational efficiencies.

We remain a Christchurch based entity and we enjoy, and are proud of, our Southern heritage.  We have close ties with heartland communities throughout New Zealand and we trade successfully and profitably in these areas.

We are confident that the work to date has positioned Smiths City to be competitive and profitable going forward.

END