Smiths City battles for market share after dropping low margin business

Smiths City Group will compete more aggressively for market share after ditching low-margin business in an overhaul of its operations aimed at fattening returns.

Since embarking on a strategic review of the business six months ago, Christchurch-based Smiths City has wound down its appliance-only Powerstore and LV Martin operations, rebranding some stores and closing others.

Chief executive Roy Campbell, who took over from 30-year veteran of the company Rick Hellings in May, told BusinessDesk the retailer had left the commodity end of appliance retail to others.

"If you observe the Dick Smith demise, it's increasingly more challenging to survive as a singly-branded retailer in appliances – it's a challenging sector and margins are very small," Mr Campbell said. "Because we trade across many segments of the retail spectrum, we present a broader offer to consumers, we have a little bit better margin generation and it's much more sustainable.

"We don't do the commodity end – the best example would be the flat-screen TV – we're not in that market. We tend to present really good brands at a fair margin."

On Monday, the company reported a 40% drop in first-half profit as the benefit of an insurance payment a year earlier washed through and as the retailer bore one-time costs from restructuring its business.

In that report, Mr Campbell said he doesn't expect to see much growth in furniture and appliances and, while it has widened margins in a flat environment, it will have to expand its footprint if it wants to improve returns.

"We do not see significant market growth in the sectors we operate in the near future," Campbell said. "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."

Smiths City said net profit fell to $2.6 million in the six months ended Oct. 31, from $4.3 million a year earlier, while sales fell a more muted 2.9% to $106.2 million. The year-earlier profit was boosted by a $2.9 million insurance payment to help repair the flagship Colombo St store. Stripping out the insurance payment, trading profit fell just 2.8%  to $2.4 million, including a $1.8 million gain from the sale of that store, and restructuring costs of $1.4 million.

Other initiatives it's adopting as a result of the review include a cloud-based logistics platform, which will be completed in March, and it's reviewing its warehouse management system, Campbell said. At the same time, the retailer has changed the way it markets its products to reflect changing media consumption patterns, and is reviewing its product portfolio, with revenues increasing from furniture, bedding and consumer electronics.

Earlier this month, Smiths City announced it had agreed to buy retailer Furniture City, giving it a foothold in the Auckland market and adding two stores in Auckland, one in Whangarei, an internet store and a distribution facility to its existing 33 stores, which spread as far north as the Bay of Plenty.

Smith City's board declared a 1c  dividend with a February 5 record date, payable on February 12.

The shares rose 1.9%  to 55c  yesterday, and have fallen 3% percent this year.

The company's net assets increased 9.8%  to $50.6 million, while liabilities dropped 33%  to $27.5 million. The company said the $19.6 million sale of its Colombo St store had enabled it to repay all its bank debt. Its overdraft is now $90,000, down from $1.6 million a year earlier, and its secured borrowings have fallen to nothing from $13 million.

(BusinessDesk)