Back in the black for Pacific Brands

Pacific Brands (ASX: PBG), well known for its undergarment and workwear brands like Hard Yakka, Bonds, Berlei and KingGee, announced a return to profit of $73.8 million, way up from its 2012 net loss of $450 million. The previous year was impacted by the non-cash $502.7 million write down of goodwill.

In 2013, total revenue was down 3.7% from $1.32 billion to $1.27 billion, continuing a downward trend in sales from $2.11 billion since 2008. Earnings during this same period have been very mixed — three of the last annual results were very large losses, which underlines the basic economic malaise and the company’s attempts to cope with these conditions.

Chief Executive Officer John Pollaers said, “Business conditions are at a four-year low and the Workwear business has clearly been impacted by this.” This clearly is reflected in the workwear category where the company cites that amongst businesses confidence is weak and there is a focus on cost reduction.

Employment growth is also slow so workwear items are not purchased at higher levels. Reduced government spending and the mining slowdown have also affected sales of large customers’ procurements.

In underwear, the company’s major brands (Berlei, Bonds, Explorer, Jockey and hosiery) make up 86% of sales in this category. Bonds sales accelerated in the second half. Its sales were up in both indirect (wholesale) and direct channels (both in store and online). Bonds outerwear sales were particularly strong, especially through company-owned retail stores. The others performed well also except for hosiery, which was down due to the late winter season and competition with other private brands.

In the footwear division, there was increased clearance activity and discounting throughout the period. After Payless Shoes was placed in voluntary administration in 2012, sales and earnings were affected, including a bad debt write-off.

Through effective management of distribution, the cost of doing business only increased 2.8% in line with inflation, by $13.8 million to $503.4 million.

A dividend of 2.5 cents per share fully franked was declared, making the full year dividend 5.0 cps fully franked, which is up from 4.5 cps in 2012.

Other clothing retailers such as Billabong (ASX: BBG), Specialty Fashion Group (ASX: SFH) and Premier Investments (ASX: PMV) are facing the same headwinds, and must control costs and market aggressively to ride out the current economic climate.

Foolish takeaway

A good investor will know the major competitors in an industry group, and learn the relative value of each so that when hard times come, they will know which ones are the good companies which can be bought at a discount, and which ones are weak and severely discounted for a good reason.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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