Clive Peeters

Clive Peeters recently fell victim to the soft consumer demand for big-ticket electrical appliances and called in voluntary administration. In the spirit of learning from vicarious experience, I prepared a quick post-mortem analysis in the following.

The company was floated in Sep 2005 issuing 40million shares at $1. The underwriter was Austock. Initial market cap was $127million. Raised capital was used to acquire Rick Hart Group in WA and the Michael King Store in Melbourne (total $10m), retiring existing debt and pay a dividend to existing shareholders (total $11m); remaining funds was used for further expansion. The company expected to make around $13million in FY2006 and had earning per share of 10cents.

Before listing, the business enjoyed 25.5% compound sales growth from 1993 to 2005 through expansion in Victoria. The business had only one store in 1993, located in Ringwood, Victoria.

As in the nature of things, the failure of a once successful enterprise is generally attributed to multiple factors:

1. Aggressive acquisition based growth results in poor operational integration and additional leverage. The number of stores grew from 23 in 2005 to 48 in 2008 (doubled in less than three years). The company reported a trading loss in 2009 and started to shut down stores.

2. The business’s expansion in a new geographic territory (NSW) failed to turn a profit. It is hard and takes time to build a national brand name. The NSW operation generated a trading loss of $6.5million in FY2007; $4.4million in FY2008. Turnaround of retail operation is extremely hard, as noticed by many investors.

3. A $20million embezzlement occurred by a senior accountant.

4. Loss of sales in high growth, high margin home entertainment and technology category, probably due to the expansion of category killer JB HiFi. The company’s traditional mix of sales (58% whitegoods and cooking, 42% home entertainment and technology in FY08) shifted to 64% and 36% in FY09.

5. Tough retail environment and global financial turmoil.

The share price of Clive Peeters had a fantastic run since listing and touched $3.50 in early 2007 (more than three-fold increase) after the company kicked start the acquisition program. After the problem of the NSW operation occurred, the share price dropped sharply then rebounded briefly (dead cat’s rebound) in late 2007 and resumed the relentless decline. The market basically priced in the bankruptcy after the share price dropped below 50c.

In my opinion, two key lessons can be learned from Clive Peeters’ five-years public market history:

1. Be aware of aggressive growth strategy of newly listed small cap companies. There are many cased of small businesses listed with the intention to consolidate and most is doomed to fail. Only a tiny number can grow big and dominate their respective industries. It is important to monitor closely and make a careful judgment whether the inflextion point has been reached.

2. Retail is a tough business and debt should only be used sparingly.