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SFG looks for black in “new world order”

Gary Perlstein By Richard Nolan-Neylan 2013_0197Specialty Fashion Group CEO Gary Perlstein may have managed to turn a profit at Rivers, but he has sparked market frustration over a slide in the performance of core brands, amid ongoing efforts to transition the business into a leaner omnichannel operation.

SFG’s share price plummeted over 20 per cent in the hours after it announced that declining comparable sales at Katies, Millers, Autograph and Crossroads had impacted its $8.39 million net loss for the year ended 30 June.

Perlstein told shareholders on Tuesday morning that management will have a “laser focus” on a turnaround for its backbone business in FY18, now that the Rivers business had managed to turn a profit in the “new world order” of retail.

But it’s not the first time Perlstein has signalled a “rejuvenation” in its core fashion business, and the market remains sceptical that intensifying competitive pressures and a difficult consumer back-drop will hamper any effort to return to sustainable growth.

Speaking to Inside Retail on Tuesday, Perlstein said that the intensification of discounting through FY17 and in July was indicative of a “new paradigm”, and that the pressures facing consumers were unlikely to abate anytime soon.

“This is the new paradigm, our aim is to out-perform the market so that if it gets tougher it doesn’t affect us as much, it just means we have to be more agile and come up with the right strategies,” he said.

“There are structural issues around electricity prices, wage growth and geopolitics – none of these issues are going away…so we’ve just got to make sure we execute better.”

It’s a conundrum that’s become all too common in retail. Perlstein remains caught between the rock of systemic and unprofitable discounting currently plaguing the apparel market and the hard place associated with resisting those pressures at the expense of sales volume.

He’s opted for the hard-place, driving comparable sales down two per cent amid increasing frequency and intensity of markdowns by competitors, but he has managed to increase gross margin by 40 basis points through the year – a strategy that’s set to continue for the foreseeable future.

“We tried to be clever about [the discounting] so they weren’t as deep, because we were trying to protect the average swell price, but certainly the quantum, the regularity of [discounting] has been more intense,” Perlstein told investors.

“We have to ensure that we succeed at [holding margin] because lowering prices all the time doesn’t land us in the right place,” he later said.

The path forward

The journey back to sustainable growth for the Group’s core businesses has begun in earnest, with many of the attributes behind Rivers’ turnaround being signalled as priorities, including weaning brand’s off the “discount drug” and getting product right.

“It will be really differentiating our product and making sure that we come to the market in a way that’s not focused on price, but rather on other messages,” Perlstein said.

Those other messages will be manifested in a store refresh program, which will first start with new store design and concept trials for Millers and Katies, now that a strategic review into the brands has concluded.

Autograph and Crossroads will undertake a similar program after their own reviews, which will take place in FY18.

The over-arching goal isn’t dissimilar to the strategy being pursued by most fashion-based retailers in the Australian market: maximising profit per sqm through omnichannel initiatives.

Online sales currently represent 10.4 per cent of total revenue for SFG, a proportion Perlstein hopes to increase first to 15 per cent and then to more than 20 per cent, consolidating the Group’s store network to transition the business to a smaller, but more profitable operation.

Click-and-collect is also now rolled out across the network, and has quickly grown to represent 15 per cent of all digital sales, with initial cross-shopping trials proving “encouraging” for broader roll-out.

“Each brand is different, but ultimately it could get to around 26 – 30 per cent, all the brands will eventually get there – it’s just a matter of time,” Perlstein explained.

SFG closed a net 39 stores in FY17 (opening 30 and closing 79), and intends to finish FY18 with under 1000 stores in the network (currently 1044).

Most of the stores in the pipeline to be closed are unprofitable, but Perlstein said SFG won’t hesitate if landlords won’t come to the table on rent, with new digital customer retention strategies in place to transition customers appropriately to the increasingly consolidated portfolio.

“We don’t know how the landlords will react, or whether there [will be] final capitulation on occupancy costs. If landlords let up on rental expectations within the next twelve months we won’t close as many, but that becomes the big swing factor in terms of how long you can keep a store going.”

Grant Oshry, director of small-cap stocks at Perennial Value, said SFG’s ability to maintain its gross margin indicates they’ve begun to get product right in the core business, and that its encouraging to see management consolidating the store portfolio, but he warned that the Group may be biting off more than it can chew by trying to improve all four brands at once.

“If they try and do all four at the same time that’s a failed approach, they need to focus their efforts and I have a strong conviction on Millers being the one they should focus their efforts on,” he said.

Perlstein admitted this morning that the focus on turning around Rivers in recent periods had impacted management’s attention on other areas of the business, but said that the holistic move towards a more profitable omnichannel business is a long-term play.

Perlstein believes he’s on the money though, explaining to investors that dropping prices to sure up comparable sales would sacrifice the sustainability of the Group.

“We have a strong view on where this is all heading in terms of digital versus bricks and mortar, we have been ahead of the curve on that and are playing a very long-term game to ensure that we transition to that point and that we have a sustainable model going into the future,” Perlstein explained.

“We don’t want to shoot for any big short wins, this is about a long sustainable base.”

His plans will be helped along by Rivers’ newfound position, which Perlstein believes is now positioned to generate sustainable growth and City Chic, the Group’s growth brand which is currently going from strength-to-strength in US department stores.

SFG opted to provide no specific guidance for FY18 other than to say July has been difficult and also did not declare a dividend for the fourth year in a row.

Al Alifa nowhere to be seen

Perlstein also provided more detail on the proposed Al Alifa acquisition, following the company’s announcement this morning that the prospective buyer had gone dark since February.

“We’ve stated that if they were to come back we’d look at it. We haven’t had any contact with them, so as far as we’re concerned they’re not there, but they may re-appear, we just don’t know,” he said.

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