v2 Report - Additional Information Supplement
KRK Kirkcaldie & Stains Limited
Press releases
Chairman's report
No year in the life of Kirkcaldie & Stains seems to be without changes, developments and milestones that dramatically impact on the company’s operations and future. The twelve months to the end of August 2006 were no exception. The financial year began without a managing director. The day-to-day running of the company was under the control of Mr. Nicholas Bartle (finance manager), as acting general manager, and the rest of the management team. I would like to thank them for their sterling efforts during the months until the board was able to appoint a new managing director. It was not until April that Mr. John Milford joined the company.
The intervening months saw increasingly difficult trading conditions and, as I reported to the annual meeting in February, sales to that point had been 4.5% lower than the comparable period a year earlier. The decreased customer demand combined with increased purchasing in previous periods resulted in the company finding itself with excess stock especially in the fashion area. In March the board made the decision based on management recommendation that strong action was required.
This resulted in the clearance sale carried out at Shed 11 in May. More details will be provided in the managing director’s report. This measure was a notable exception from Kirkcaldies’ established strategy but was successful in reducing stock and increasing the company’s bank balance. The company welcomed John Milford into the role of managing director in early April. The impending clearance sale required him to act quickly and decisively. The fact that it was as successful as it was, demonstrates Mr Milford’s abilities.
Together with his team of seven managers he has since assembled ambitious plans for the retail store which, at the time of writing, are under way and by the time this annual report reaches shareholders will be largely completed in advance of the busy Christmas trading period. Longer term plans are to be subject to a complete review by the management team and the board in the coming few months. The introduction of a new hand at the helm of the ompany was an appropriate time to reassess its direction.
Another important event in the year was a change in key shareholders that saw LQ Investments Limited purchase 19.90% of the company’s share capital in March 2006. The board viewed this move as a demonstration of confidence in the company’s future by a small group of respected Wellington business people. In April Mr Denis Thom joined the board as a nonexecutive, independent director. The intention to introduce an additional director to the board was irst brought to shareholders’ attention at the 2005 annual meeting when directors’ fees were last reviewed.
Mr Thom, as a professional director who had already achieved a distinguished legal career, has held many positions on the boards of a wide range of organisations and brings much-appreciated knowledge and experience to the board table. The board has taken action to address the approaching maturity of the two store leases.
A committee of the board has been set up to manage the company’s strategy in relation the properties it owns or occupies. The board has entered constructive engagement with the landlords with the goal of reaching satisfactory arrangements in advance of the December 2008 when the first of the two store leases expires. The financial performance during the year has been disappointing. The retail arm of the business did not make an adequate profit having inherited unnecessarily high levels of inventory from previous periods. It was essential that we addressed the surplus stock situation and the solution came at a high cost.
Ownership and management of the Harbour City Centre has provided increased profit this year and has again proved a valuable foil to the fluctuation in the retail sector. Given the modest surplus, the board has decided that it would not be prudent to pay a dividend this year. The group’s consolidated balance sheet remains strong and, following the reduction of stock that resulted from the fashion clearance sale and the routine sale in July and August, the cash position at year end was exceptionally favourable. This cash strength has enabled the retail operations to undertake changes in the store that are intended to lift sales and return the company to higher profitability.
J D Tait
Director's Report
Readers of this annual report, especially those who study the financial statements, will immediately recognise that the profit for the year fell well below the group’s recent achievements. Th board of directors has been quite open about the shortfall in sales that was experienced for the greater part of the year. At the annual general meeting in February it was disclosed that sales for the first four months of the year had been tracking at 4.5% below the comparable period a year earlier. In June the board announced its forecast for the full year result which it then estimated at between $450,000 and$480,000.
The surplus before tax for the year actually turned out
to be $880,000. This was 49% of the surplus for the 2005 financial year.
Shareholders have the right to ask why such a disappointing surplus
occurred and the board and management team have questioned themselves in
depth to identify the causes but there is no simple answer. It must first
be explained that the drop in profitability was endured by the retail
operations; the property business having increased its pre-tax
surplus by 18% to $599,000.
One aspect of the retail business that the company often (and correctly) quotes is that its costs are largely fixed. The major items of expenditure such as rent and depreciation are totally unavoidable and do not fluctuate with the level of trade. The number of employees and their pay rates can only be changed over the medium term. Moreover it would be short-sighted and expensive to make significant staff changes quickly. These three types of cost – rent, depreciation and payroll make up 66% of our total running expenses. Any drop in gross profit that stems from a decline in sales therefore has analmost equal effect on our bottom line.
Since joining the company I have instituted a strict cost
management philosophy with the aim of reducing as far as possible all
costs but with a special emphasis on costs incurred in the support
functions of the business. This involved a review of the support staffing
towards the end of the financial year which resulted in a small number of
redundancies. The full benefit of such measures will only be felt in the
future. Another contributing factor to the year’s result was
over-stocking.
Many lines of merchandise in the store have to be ordered
up to 18 months in advance and it is difficult to anticipate customer
demand accurately so far ahead. The situation was exacerbated by lower
sales and Kirkcaldie & Stains found itself with excess stock,
particularly in its fashion showroom. Processes have since been reinforced
to ensure that the company is not put in a similar position again. In
order to solve the problem expediently it was decided to break with
Kirkcaldies’ tradition and hold a clearance sale outside of the store in
addition to the two annual sales. The two-week clearance held at Shed 11
on the waterfront was an outstanding success in that it achieved our goal
to reduce stock.
It was necessary to offer significantly marked-down prices to ensure that the merchandise sold within the limited time frame. The combination of lower margins and the costs of organising the event resulted in an overall loss but put the retail business in a solid position to move forward. Occupancy of the Harbour City Centre remained at over 96% throughout the year resulting in a 4.4% increase in rental income. It was necessary to carry out some one-off repairs and maintenance to the exterior of the building but total expenses were held within budget. The Kirkcaldie & Stains Group now occupies over 17% of the premises.
The financial position of the group is strong. At year end working capital included surplus cash on deposit – a marked improvement on the debt at the end of the previous year. These funds will be utilised for instore developments described below which have been carefully selected and designed to maximise future earnings. Kirkcaldies was very pleased to learn in December last year that it had been ranked top in the whole of New Zealand for retail service.
Roy Morgan International, a respected Australian market research company, routinely carries out nation-wide consumer surveys in New Zealand. During the period from September 2004 to September 2005, Roy Morgan measured that 71% of people questioned who had shopped at Kirkcaldie & Stains during the previous four weeks were very satisfied with the service they had received. Building on this, we have commissioned our own market research involving focus groups of carefully selected customers and potential customers.
This annual report includes selected comments made by some of the participants in the focus groups. The research was undertaken to provide a profile of the store’s customer base. Many of the characteristics of the “typical” customer confirmed our previous impressions: for example that they were in higher income brackets, were likely to have tertiary qualifications and travelled extensively. One reassuring result of the profiling exercise was that 64% of our customers were below 50 years of age.
The “typical” Kirkcaldies customer was therefore younger than had been assumed in the past and demonstrates the success of recent changes in store to keep the layou and product ranges current and exciting. Behind the scene developments have been on-going throughout the year. We have consolidated the use of a new payroll package involving a telephone based clocking system that automates capturing time and attendance data for our staff who work complex and variable rosters.
Our computer systems have been upgraded and the central bank of servers relocated into purpose-built space in the Harbour City Centre. Planning and preparation for a new retail management system (including computerised point of sale functions) is progressing well. To continue to capitalise on our other accomplishments, further rejuvenation is under way in the store. Much of the planning and design was done during the last financial year but it has been since year end that physical signs of the moves have been apparent.
Departments on the ground floor on the main store have been rearranged to make more logical associations between products and to expand retail space. The K&S Caféon the ground floor has closed but the restaurant on the second floor has expanded to compensate and offers wider men choices. New suppliers have been introduced to provide fresh ranges of products with instantly recognisable national and international brands such as Laura Ashley and BOS Furniture.
Developments will be suspended during December so as not to impinge on peak Christmas trading but will be resumed in the New Year. The 2006 Christmas Shop is located in the Harbour City Centre partly due to the amount of work taking place in the store but mainly to demonstrate Kirkcaldies’ commitment to the property. It has enabled us to create an exciting new environment for the festive merchandise whilst retaining all of the traditional elements that make the Kirkcaldie & Stains Christmas Shop the destination that it has been for many years.
I would like to take this opportunity to thank everyone for making me welcome at Kirkcaldie & Stains. I have been impressed by the dedication of the staff, the interest and sense of ownership demonstrated by shareholders and the support and confidence shown to me by my fellow directors. To use words made famous by Her Majesty the Queen when she was describing 1992, the 2006 financial year has been an “annus horribilis” for Kirkcaldie & Stains – one on which the shareholders, board and management alike will “not look back with undiluted pleasure”.
However, whilst looking back can provide some
lessons, more can be gained by looking to the future which for the
Kirkcaldies Group, contains many exciting and positive elements. The
management team and I are working hard to take the retail operations to a
new level and building on the iconic position that Kirkcaldies already holds in Wellington.
J Milford
> Managing
Director
