HLG - Hallenstein Glassons Holdings

[seaweed]

Unlikely to surprise in HLG results this coming Friday, forecast from FB on GoodReturns yesterday.

[winner (n)]

Unlikely to surprise in HLG results this coming Friday, forecast from FB on GoodReturns yesterday.

And share price will go up by about size of divie announced

[seaweed]

And share price will go up by about size of divie announced

Yes you are right. It happened a year ago. SP went up 21c on announcement date and another 7c the next day, dropped back 2c the next day and the next day on the 7/10/22 went up 10c then weekend, then on Monday the 10/10/22 it went up another 15c. Talk about divi chasers. Then it took a breather for 4 days and then you know the rest. So will be interesting what happens tomorrow, but we are coming from a high base compared to last year so who knows and good luck to all holders and divi chasers for tomorrow.   

[Hectorplains]

Happy days for holders.  Sales up, profit up, margins and dividend steady. 

[ezek22]

Yeah, that was kind of expected. But about the outlook not great, I guess we were expecting a decline and it compares with a solid start last year, sales were up 68%

[Hectorplains]

Yeah, that was kind of expected. But about the outlook not great, I guess we were expecting a decline and it compares with a solid start last year, sales were up 68%

Agreed, the tougher economic conditions etc were always going to have some impact.  I thought their outlook statement was mostly positive - a 'we've got this' vibe .  A whole lot more reassuring than what some other retailers have provided!

[Basil]

Solid result.  For divvy hounds its great to see them implementing new intercompany charges which reflect various matters of value N.Z. operations provide to Australia.  See announcement.  Sound logic there as we can't claim franking credits whereas these charges boost income here and lead to an increased level of imputation credits here.  Additionally, the tax rate is 30% there and 28% here.  Great move and has only marginally impacted profitability of Glassons Au whereas profit from Glassons N.Z. and Hallensteins is well up.

Dividend at 24 cents with 75% imputation credits is of considerably more net value to shareholders than last years unimputed dividend of the same amount.

Balance sheet remains strong.

Gross profit remains satisfactory.  Couldn't help myself have a bit of a chuckle.  HLG made more profit than WHS despite selling just over $400m whereas WHS sold 3.2 Billion, 8 times as much. One has well proven management and the other...oh dear...

FY24 Outlook was slightly better than I expected with sales down just under 6% YTD compared to the same period last year (very strong trading period) and positive commentary on gross margin improvement was most welcome.

All things considered this is a slight beat on my expectations in terms of outlook and a sound beat in terms of how they have recalibrated intercompany charges to fairly reflect value provided to Australia such that the level of imputation is considerably higher than I expected.

Too early to update my forecast for FY24 but $25m net profit I previously mentioned looks a bit too conservative.

I think the shares are about fair value at around the current level and I expect HLG will cope with the current trading headwinds better than most. 

[Hectorplains]

Solid result.  For divvy hounds its great to see them implementing new intercompany charges which reflect various matters of value N.Z. operations provide to Australia.  See announcement.  Sound logic there as we can't claim franking credits whereas these charges boost income here and lead to an increased level of imputation credits here.  Additionally, the tax rate is 30% there and 28% here.  Great move and has only marginally impacted profitability of Glassons Au whereas profit from Glassons N.Z. and Hallensteins is well up.

Dividend at 24 cents with 75% imputation credits is of considerably more net value to shareholders than last years unimputed dividend of the same amount.

Balance sheet remains strong.

Gross profit remains satisfactory.  Couldn't help myself have a bit of a chuckle.  HLG made more profit than WHS despite selling just over $400m whereas WHS sold 3.2 Billion, 8 times as much. One has well proven management and the other...oh dear...

FY24 Outlook was slightly better than I expected with sales down just under 6% YTD compared to the same period last year (very strong trading period) and positive commentary on gross margin improvement was most welcome.

All things considered this is a slight beat on my expectations in terms of outlook and a sound beat in terms of how they have recalibrated intercompany charges to fairly reflect value provided to Australia such that the level of imputation is considerably higher than I expected.

Too early to update my forecast for FY24 but $25m net profit I previously mentioned looks a bit too conservative.

I think the shares are about fair value at around the current level and I expect HLG will cope with the current trading headwinds better than most. 

The key concern for me is the rather old fashioned way they're doing business.  Obvious things like:
Paying a dividend out of cashflow rather than selling a building and taking on debt. 
Underpaying head office, CEO Duncan's salary is $650K (around half the average for companies of similar size in the NZ market.)
Not a single mention of an 'integrated ecosystem' (although 'agile' snuck into the last sentence - so there is hope!  )

[ezek22]

Solid result.  For divvy hounds its great to see them implementing new intercompany charges which reflect various matters of value N.Z. operations provide to Australia.  See announcement.  Sound logic there as we can't claim franking credits whereas these charges boost income here and lead to an increased level of imputation credits here.  Additionally, the tax rate is 30% there and 28% here.  Great move and has only marginally impacted profitability of Glassons Au whereas profit from Glassons N.Z. and Hallensteins is well up.

Dividend at 24 cents with 75% imputation credits is of considerably more net value to shareholders than last years unimputed dividend of the same amount.

Balance sheet remains strong.

Gross profit remains satisfactory.  Couldn't help myself have a bit of a chuckle.  HLG made more profit than WHS despite selling just over $400m whereas WHS sold 3.2 Billion, 8 times as much. One has well proven management and the other...oh dear...

FY24 Outlook was slightly better than I expected with sales down just under 6% YTD compared to the same period last year (very strong trading period) and positive commentary on gross margin improvement was most welcome.

All things considered this is a slight beat on my expectations in terms of outlook and a sound beat in terms of how they have recalibrated intercompany charges to fairly reflect value provided to Australia such that the level of imputation is considerably higher than I expected.

Too early to update my forecast for FY24 but $25m net profit I previously mentioned looks a bit too conservative.

I think the shares are about fair value at around the current level and I expect HLG will cope with the current trading headwinds better than most. 

Great points!! thank you for sharing that. Yes, definitely intercompany charges were a great move! And you a right about FY24, I mean, to spect better earnings than FY22 26m if the company is going to be only -6% rev for the year but with better margins doesn't sound to crazy to me!

[ezek22]

The key concern for me is the rather old fashioned way they're doing business.  Obvious things like:
Paying a dividend out of cashflow rather than selling a building and taking on debt. 
Underpaying head office, CEO Duncan's salary is $650K (around half the average for companies of similar size in the NZ market.)
Not a single mention of an 'integrated ecosystem' (although 'agile' snuck into the last sentence - so there is hope!  )

     Would be good if they could do a Glasson crypto coin, or nfts for some exclusive models. Some AI deployment would help as well

[Waltzing]

"The key concern for me is the rather old fashioned way they're doing business.  Obvious things like:
Paying a dividend out of cashflow rather than selling a building and taking on debt. "

shocking... shocking... shocking....

GOSH!!!

does the SP reflect this?  last DIV share price pre NZX50 was 5.80 ish...

or does this say something about the country as a Hole?

blimey ...

https://www.nzx.com/announcements/419108

 stone the crows ....

will anyone believe it ...

H&M took a hit yesterday ..

[Shareguy]

A good result but outlook cloudy. With the cost of living, increased costs, shoplifting I don't think retail is the place to be in the short term. They have done well to maintain margin due to they say freight and cost efficiencies. FB latest note has it as underperform.

[seaweed]

A good result but outlook cloudy. With the cost of living, increased costs, shoplifting I don't think retail is the place to be in the short term. They have done well to maintain margin due to they say freight and cost efficiencies. FB latest note has it as underperform.

Wow, if that is underperform and paying 48c div at 8% yld., just imagine when it starts to perform and goes up a dollar and collect a div on the way and another div 4 months later. Must be time to top up again before it hits 6 dollar.  Smiley face with sunglasses.   

[winner (n)]

Glassons AU only held share last half year (if I go to 3 decimal points up a tiny bit). However still up from a year ago.

Hope market presence not starting to fade

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[Basil]

Very well considered post by Muse on the other channel.

It already is - the 1H was a fantastic result - the 2H was quite poor, and that looks like continuing into FY24. A few observations.

A helicopter perspective first. Sales in the 2H were up 3.2%, while NPAT fell 18.6% over the same period. Sales for the first 8 weeks of FY24 are down 5.9%. So using the exit run rate from the 2H, when a lift in sales of 3.2% still produced a fall in NPAT of 18.6%, what happens to NPAT when the group is posting now meaningful declines in revenue? It's clear topline growth is no longer translating through to earnings growth, and from the inflationary effect on CODB there are substantial cost issues & the business is increasingly operationally leveraged, a highly undesirable position to be in with falling volumes & sales.

Case in point - 2H revenues of $186.4m were higher than in any of the preceding 5 financial years, but 2H NPAT of $11.152m was also below all those same periods. Implicitly its 2H NPAT margin as a % of sales is also now lower than the previous five 2H results.

This is despite a 180bps improvement in group GP margins achieved in the 2H, relative to the first half. In post #8895 I mused if GP margins had troughed in the first half (given freight rate movements and if not would be in the 2H) and that looks to have transpired, a positive development. That said the outlook for margin still looks challenging given the group purchases raw materials (and pays for inward freight) in US dollars, and both the NZD and AUD have depreciated considerably in the new financial year relative to 2H FY23. I would have thought the group, particularly in Australia, completed the bulk of its excess winter clearances in July (typically the biggest month for winter discounts) and perhaps some into August, necessitated by a warmer winter, so I'd expect some overall margin improvement in the new year.

So that really shines a spotlight on overheads/cost of doing business (CODB), and the growing operational leverage in the business. In the 1H FY23 result, management commented they were looking for cost efficiencies wherever possible. Despite that, CODB (including lease interest expense) still increased 9.1%. Sure, a few new stores stores since then, so on a CODB per average store basis, increased about 7.3%. If you break it down more looking at the cost segment notes, all up lease & rental expenses per average store (ROU depreciation + ROU interest + expensed short term rentals) were up about 12.9% per AS, wages up 3.9% per AS, outward distribution largely variable and consistent as a % of sales, and other CODB/average store up about 6.5%.

I wouldn't necessarily expect CODB to continue at that rate into FY24 but I don't think it will be materially less than that. Wage pressure persists in both countries (particularly in Australia), which hopefully the group can offset some by flexing and releasing casuals as demand falls (and I expect they did in the 2H FY23). Rent remains high and many of them will have references to CPI which hurts in a falling demand environment. It'll take a few years for that to fully normalise as leases come up for renewal as pressure grows on landlords to improve terms in respect of the macro environment. Rolling forward will be additional lease expense associated with new office and warehouse space taken next to the Sydney fulfillment centre that wasn't in 1H Fy23's result (a bit of an investment for the future). Insurance costs, security costs, rates are all headed in the wrong direction. HLG's board and management team are very savvy old hands renowned for being hard negotiators so I'd expect they will do a better job than most in managing the situation. That said they have a new CEO coming in from KMD, which is a much more top heavy, bureaucratic and ESG focused model so probably worth considering how that could impact on cost creep in the future.

On the demand side, a 5.9% fall in sales over the first 8 weeks of the new financial year is meaningful when you consider the impact of inflation and the monthly spike up associated with the FIFA WWC in both countries. I note that Forbar who are the only analyst covering HLG were forecasting immediately prior to today FY24 NPAT of $23.6m, and only expected sales to fall 1% in 1H FY24, so not tracking well from that perspective. To be fair their reports never really mentioned the impact of freight on GP and centred on FX so I wouldn't be surprised to see if they now revise their revenue assumptions, GP %, and adjust CODB forecasts accordingly following todays report.

The most important 2 months of the financial year are November and December which isn't far away, so one shouldn't read too much into the first 8 week run rate (up or down). Rent is high (& accelerated to a record high in NZ last month), food price inflation remains high if moderating, fuel has gone back up to very uncomfortable levels, student debt interest is increasing, parents mortgages are increasing as they roll off fixed terms, and unemployment while very low will probably only go in one direction. You'd have to do some mental gymnastics in order to rationalise a positive retail demand picture. A new Glassons AU store in scheduled for opening in December (most of the way through 1H), and probably another one in the 2H if history is any guide, but with ~119 in the network the margin gain from individual new store openings is diminishing.

The most positive thing in the 2H result from my perspective was the implementation of transfer pricing & its positive impact on imputation credits and theoretical lowering of future effective tax rates. Early last year I commented on this thread that they should implement one - nice to see it being actioned
The gradual erosion of imputation credits is an issue for dividend loving kiwis but there is one partial solution to it that could be implemented, transfer pricing.....multi jurisdiction retailers give regard to (with high levels of outside professional advice) a transferpricing policy that ensures the appropriate level of profit earnt and tax is paid where the bulk of the underlying value creation occurs. IE, the design, procurement, marketing, and financing functions....Glancing at the FY21 stat accounts it appears Glassons AU has slightly better GP margins than Glassons NZ - that signals no transfer pricing arrangement as any inter company fees to recover those vital functions would normally be borne in COGS and dimish gross profit margins....I've had a brief glance through linkedin and it appears the majority of glassons non retail staff (ie design, procurement, marketing & finance) are in NZ (but certainly not ALL of them - James Glassons is in AU for instance).From a tax perspective this would do 3 things. It would lower HLG's tax risk in NZ as it could be argued HLG should be charging more for some of those services. It would increase the tax paid in NZ. And it would increase the imputation credits available to HLG's overwhelmingly NZ shareholder base.
That's a real tangible improvement and well done to management for implementing it. And that they retained the 24cps dividend which was a gimmie given they underpaid in 1H and brought the full year payout to 89.5% (FY18 to FY23 average payout of 90.3%).

Anyway - one long TLDR muse from me - all my opinions & initial reactions only. Retail an increasingly volatile beast so critical to do your own research and come to your own view.