year end tidy up, page-5

The competitors to SFH are a different proposition. SFH is a price conscious retail player bumping into both Wesfarmers and Woolworths on one side, PMV/Zara and other smaller groups on the other and growing and more sophisticated online retailers on another.

This makes little old SFH a bit of a punching bag with little scope to compete, with the only hope to steal ground from smaller players.

With retail sales just matching inflation and the hope that as wages grow some of that filters through to retail spending rather than saved (ie estimate of 1% sales growth over the next 12 months) this does not bode well for the likes of SFH and its profitability, with more going into online and the big two, and when customers want to splurge, they will skip the likes of SFH and head up-market.

If you look at its proposition, it is a bricks and mortar retail business with a low grade online offering on its website. It is a second rate retailer in a low margin industry and unless it positions itself appropriately for the future then the industry will not be kind to SFH. It has to reinvent itself or become redundant. As manufacturers get closer to the customers with the use of the internet, low cost sellers will just become distribution houses and places where customers just try on outfits and order direct from the manufacturer. Over time this will make the current proposition of SFH become redundant, and if the company is focused on store rollouts, as it continues to be, sinking large amounts of cash into store fitouts and working capital, then its profitability will only diminish overtime.

It currently is competing on price utilising a high cost mode of distribution. Gary needs to make a serious decision, to either compete on price and use its buying power to offer a lost cost proposition including getting serious about its online proposition or change its retail offer through service (that is, styles with shorter life span or move up-market to catch the hot discretionary spending from customers that want that outfit now). What amazes me is that Gary is working in an industry that is focused on fast moving trends and having to meet changing tastes and demands quickly, and yet he has not addressed the most pressing issue that is facing his business, which is the fast moving trend away from bricks and mortar stores to cheaper online propositions. Gary?s February presentation addressed ?Growth in online sales? however if you go to their website, the online offer is inconsistent across each brand and poor at best, with the full range of outfits not available on the website, and platforms being as separate and distinct as their physical stores. It is time to get serious with the strategy.

Based on the current price of 95 cents and earnings of 12 cents a share this equates to a yield of 12%. However, if Gary does not focus the business then that earnings may only last another 5 - 10 years, and so on that basis the business needs to be valued, with a terminal value run of that may actually be quite insignificant. If this was the case then the share price would be significantly lower than where it is today.

I would say it is not a just the share seller selling into an illiquid market, but a market that is slowly re-rating the share price to a more appropriate level.

I would be holding off buying until a more appropriate level. That level is unclear until the full year result as released, or at least guidance has been provided.