Underwear and apparel manufacturer Pacific Brands Limited (ASX: PBG) is the company behind well-known brands such as Bonds and Sheridan. Shareholders of Pacific Brands have had a rollercoaster ride in the past five years, with shares dropping from highs of $1.52 to a current price of $0.57. Just as investors thought it can't get any worst, the release of its most recent annual report, yet again failed to impress. Here are some key highlights from today's report:
- Earnings before interest and tax down 25.3% from FY13
- A reported net-loss after tax of $224.5 million
- Plans to divest its Workwear Group to Wesfarmers Ltd (ASX: WES)
- No final dividend was announced, bringing its total dividends for the year to 2 cents per share, fully franked.
- A new Chief Executive Officer was appointed
What this means?
Despite what seems to be terrible news, Pacific Brands is up 1% today, partially because of its divesture and the fact that disappointing news was already expected.
However, if we dig a bit deeper into the underlying reasons for its performance, we can see that its net-loss after tax was primarily due to one-off items such as impairment charges and restructuring costs from cost-cutting initiatives.
Furthermore, Pacific Brands continues to see very strong sales growth from its two largest divisions, with Bonds experiencing a 19.9% lift in sales and a 15.6% increase in Sheridan sales. However, growth from these areas has been particularly impacted by weaker underwear wholesale margins, resulting in lower bottom-line growth.
I think Pacific Brands has performed relatively well given the fact that our gloomy retail sector has put many companies into financial hardship. Higher sales from its key businesses indicates that its products are still in demand and it seems to me that Pacific Brands needs to focus more on improving its bottom-line position.
What's Next?
Although its earnings position seems weaker, Pacific Brands has been taking what I think are, appropriate measures, to regain composure.
In its most recent annual report, Pacific Brands announced plans to divest its Workwear business to Wesfarmers Industrial and Safety. This will result in gross cash proceeds of about $180 million and an expected profit on sale of $35 million.
Its Workwear business has seen sluggish growth due to significant declines in the industrial market and the proceeds from this sale can be used to restore its balance sheet strength, given its spiking debt position.
Furthermore, Pacific Brands' recent string of acquisitions has also allowed it to support its growth by purchasing companies such as Shoe Warehouse, Shoe Superstore and Incorporate Wear (UK). These are the driving forces behind higher sales growth.
However, strategic acquisitions should no longer be a priority for Pacific Brands and its most recent strategic review signals a shift towards a more efficiently run business. Luckily for shareholders, hefty restructuring charges and the sale of its lagging Workwear business reflects efficiency endeavours and sets Pacific Brands up for some long-term growth.
Its cheap price-to-earnings ratio of 10 may scream a bargain to investors, but I am still not impressed given our weak retail sector and the fact that cost-cutting endeavours are yet to materialise into significant gains.
I'll definitely be watching Pacific Brands from the sidelines, until I am fully convinced that performance will be materially improved for the long-term.
