We know that in this slowdown, it is possible to lose money selling people what they want, as well as what people don’t want.
The media is doing it tough as a result, some retailers are doing OK (Woolies and JB Hi-Fi), health care companies are travelling OK (as we saw with Sonic yesterday), but resources, oil and building companies (remember Boral and James Hardie) are struggling.
Some have been hit through their offshore businesses (Boral and Hardie and the resource companies), some have been hurt here by the slowdown in their sectors, or by the credit crunch (e.g. banks and investors like AMP).
Consumer products and consumer discretionary were supposed to be good havens, along with beer and gaming: the jury is still out on the latter, but if the consumer products group has high levels of debt, like Pacific Brands, then its trouble time, as nearly 2,000 Australians found yesterday.
A major surprise yesterday was the poor result from major food group, Goodman Fielder.
The shares plunged 18.5% $1.14 after the company, Australasia’s biggest listed food group, reported a 21.9% fall in interim earnings.
That was despite a 12% rise in revenue, much of which was due to higher prices forced on it by higher input costs.
Consumers were under pressure and in more and more cases were turning to cheaper house brands from major retailers.
(It’s called ‘trading down and is a major development in the US and UK retailing sectors, even involving consumers abandoning some retailers for the likes of cheaper Costco and especially Wal-Mart).
Goodman Fielder (GFF) said net profit for the December half year was $73.9 million, down from $94.6 million in the previous corresponding period.
Sales rose 12.2% to $1.48 billion.
Goodman Fielder said it expects trading conditions to pick up in the second half of 2008/09 and be even more positive in 2009/10.
As a result, it has forecast a strong rise in annual profit for this financial year.
"Net profit after tax for the current year is expected to be in the range of $170 million to $185 million," it said in a statement on Wednesday.
Its 2007-08 net profit was $27.7 million.
"Despite significant increases in commodity costs and the impact on inventory values at period end, working capital was held to a similar level to that as at the close of the prior financial year," the company said in the statement to the ASX.
"There were two main contributory factors to the earnings decline: the extreme volatility of commodity costs and changing consumer buying patterns."
During the first half, high commodity costs impacted margins and added $120 million to the company’s cost base.
"Although international commodity costs are now retreating from an extended period at record high levels, little benefit was realised in the period due to time lags inherent in purchasing contracts and in clearing higher cost inventory of grains and oils," Goodman Fielder said.
It also noticed that negative economic conditions had hurt consumer confidence, resulting in a drift to cheaper alternatives such as house brand products.
"The continuing severe economic conditions have caused an erosion of consumer confidence and this has resulted in a drift to cheaper alternatives such as house brand products.
This has impacted margins and had a negative effect on earnings which the company continues to combat by maintaining brand support and bringing new products to the market.
"The company continued to vigorously pursue internal savings through a continuing close attention to plant and other efficiencies. It is anticipated that this will result in a 5% reduction in employee numbers for the full year, predominantly through natural attrition. Restructuring costs incurred in the period amounted to $6.6 million."
Goodman Fielder said its key challenges were the impact of a recessionary economic environment on consumers and continuing volatility of commodity costs.
"We anticipate a softening of demand during the remainder of the financial year as our trading partners reduce inventory to preserve cash and to take advantage of falling commodity costs," it added.
"As well, we expect a competitive pricing environment as industry participants endeavour to clear higher cost inventory.
"The company will benefit from softening commodity costs as this will assist with margin recovery, particularly in our baking, dairy and Asia-Pacific businesses."
Goodman Fielder declared an interim dividend of 4.5 cents, down from six cents in the first half of 2007-08.
And the company believes it has no problems with debt:
"The company is comfortable with its net debt level of $1.1 billion as at 31 December 2008. Replacement arrangements for all maturations that will occur within the balance of the financial year have been completed," Goodman said.
