The half-year reporting season has begun in earnest this week with a slight trickle of financials coming through.
Of little interest to us so far are the reports from a number of listed investment companies (LIC’s) and also Agenix Limited (ASX: AGX), an unprofitable early-stage medical device company. These reports and many others like them are quickly pushed to one side to ensure we focus our time, energy and effort on more productive outcomes. Conversely, we have read GUD Holdings half year with interest.
GUD’s core business is the management and distribution of a suite of ‘brands’. One of those brands in their consumer division is Sunbeam, a range of small kitchen appliances which heavily competes with Breville Group (ASX: BRG) for market share. We have had a financial interest in Breville for some time, and it is a business that you may well know by now as well.
Putting aside the fact that GUD divested their 19.3% stake in BRG in early 2012 for $3.35 a share (currently $6.40), it was notable in management’s commentary (given Oates saw only small reductions) that a decline in Sunbeam sales was responsible for the lion’s share of a 15% decline and a 38% fall in EBIT, the worst performing division for the group by a wide margin.
Understandably, and in an attempt to arrest the fall, management has flagged a need to align the cost base with the competitive landscape they are facing, pursue offshore alliances to build scale and revitilise their product development program to boost returns. Does this new strategic direction sound all too familiar?
Post the exit from its Homeware’s division, Breville was free to focus on its core electrical products with a number of goals:
• Operational efficiency and excellence,
• Restructure the cost base to be more competitive and improve margins,
• Maintain investment and focus on product innovation and development,
• align the company with its product with a name change to Breville Group Limited and
• Leverage the brand and product innovation with a reset cost base into international markets.
Because the results of the above strategy have been nothing short of stunning, understandably one has ask why GUD took so long to follow in the same footsteps? The next logical question is can they succeed?
Perhaps, but our investment stays with Breville for the time being.
It is clear that Breville has brand leadership. It is considered one of the best products in the business and as such, has been taking market share from its competitors. If you are on the losing side in this environment, a reactive, delayed, follow-the-leader approach to restructuring your business does not inspire the greatest level of confidence as a potential investor (particularly when this restructure must occur for what was GUD’s largest division).
With a $17m decline in sales in the consumer division announced in the first half, there is a possibility that BRG was on the other side. Even if the spoils are never shared equally, the Breville half year report is eagerly awaited by our investment team for an update.