The appointment of PwC as administrators of Postie Plus Group offers an important lesson for investors, particularly retail company shareholders.

It has also demonstrated that troubled entities can use the voluntary administration facility of Part 15A of the Companies Act 1993 to avoid receivership and continue trading.

The message to investors is that they have to look at the notes to the financial statements to fully assess the health of a company, while Part 15A offers companies a help line, somewhat similar to Chapter 11 bankruptcy provisions in the United States.

The Postie Plus sharemarket story began on July 30, 2003 when the company lodged its IPO prospectus.

The Christchurch-based group was an amalgamation of the following four retail entities:

• Postie Plus, which had 59 stores, was established on the West Coast in 1909 and had been owned and operated by the Dellaca family since then.

• Babycity, with seven stores, which was established by the Nuttall family in 1986.

• Rendells, also with seven outlets, had been owned and operated by the Rendells since 1882.

• Arbuckles, established by John and Vickie Arbuckle in the 1980s, had 20 stores. It was acquired by Postie Plus for $9.5 million from proceeds raised from the IPO.

The prospectus described Postie Plus as a national casual family clothing chain and Rendells as an Auckland-only specialty department store chain. Arbuckles operated a national manchester chain and Babycity focused on baby care.

Chairman Peter van Rij admitted that the Postie Plus chain was “a relatively mature business with limited opportunity for geographic expansion” but the directors believed that growth could be achieved by “acquiring other retail chains that will benefit from the application of the Postie Plus business model”.

The IPO involved the sale of 20 million shares – 15 million new shares and five million existing shares – at $1 each. There were 40 million shares on offer after the issue, with a Dellaca family-controlled company holding 20 million shares or 50 per cent of the newly-listed company.

Richard Dellaca and John Dellaca, grandsons of the original Postie Plus founder Thomas Dellaca, were executive directors.

Postie Plus attracted no significant institutional shareholders but its share price finished its first trading day at $1.25 on relatively high turnover of 2.46 million shares.

Unfortunately that was its all-time high. The company’s share price was trading at around $1 12 months after listing as net earnings for the year ended July 31, 2004 were below the prospectus forecast, after taking into account restructuring costs.

The listed company’s first rationalisation occurred in the 2005 year when most of the large Rendells stores were converted to Postie Plus outlets and the smaller Rendells outlets were closed.

The Dellaca-controlled company, which owned 50 per cent of Postie Plus, was liquidated and shares in the listed company distributed to Dellaca family members. This started the slow but steady selldown of Postie Plus shares by Dellaca family members.

In 2007 Jan Cameron, the founder of Kathmandu, started accumulating Postie Plus shares and the following year shareholders approved the sale of Arbuckles to Cameron.

Postie Plus reported a loss of $10.85 million for the July 2008 year, $5.1 million of which was attributable to Arbuckles’ trading losses and realisation costs.

The following year Postie Plus expanded again by increasing the number of Postie Plus stores from 75 to 79 and Babycity from 19 to 24.

The Babycity expansion was short-lived as the baby care chain continued to perform poorly and was sold in May 2012. Babycity was a major contributor to the group’s 2012-year loss.

Postie Plus’ poor performance over the years has been due to a plethora of negative external influences and poor decisions.

These include: bad weather, good weather, high petrol prices, the low NZ dollar, stock management problems, logistic issues, Christchurch earthquakes, the global financial crisis, a low exposure to Auckland, Rendells, Arbuckles and Babycity.

The transfer of the the head office from Christchurch to Auckland in recent years has also been problematic.

Debt and long-term operating lease commitments are two of the biggest issues facing all retailers. Long-term operating lease commitments, which are usually included at the end of the notes to the financial statements, are non-cancellable lease obligations to external property owners.

There is a strong argument that retailers should have little debt if they have large operating lease commitments yet Postie Plus had bank debt of $16.8 million and lease commitments of $26.4 million at the end of its 2013 year.

These large lease commitments can be a huge drain on retailers because they curtail their ability to restructure or close poorly performing stores. They also reduce the price a retailer will receive when it sells a chain of stores, as experienced by Postie Plus when it sold Arbuckles and Babycity.

Similarly, NZX-listed Renaissance Corporation has been shackled with ongoing operating lease commitments after selling its Yoobee Apple computer retailing operation.

Briscoe and Pumpkin Patch are two large listed retailers at the opposite extremes of the debt and lease commitment obligations spectrum.

At the end of January Briscoe had no debt, cash of $84.4 million, operating lease commitments of $106.4 million and earnings before interest and tax (ebit) of $45.2 million for the previous 12-month period.

On the same date Pumpkin Patch had $55 million of debt, $1.8 million of cash, operating lease commitments of $117.4 million and ebit of only $4.9 million for the previous 12 months.

These are the reasons why Briscoe continues to raise its dividend while Pumpkin Patch no longer pays one.

Meanwhile, Postie Plus has been struggling and its 2013 annual report was late as was its interim 2014 profit announcement to the NZX. The latter report stated that bank debt had been reduced to $12.1 million on February 28, 2014 following the sale of its SchoolTex brand to The Warehouse for $9 million.

However, the report went on to state that “Postie Plus remains in breach of its banking covenants and expects to remain so for the foreseeable future” and “a number of parties have expressed an interest in Postie Plus’ recapitalisation process”.

The company was placed into voluntary administration under Part 15A of the Companies Act on Tuesday and the following day PwC announced it had a conditional sale.

Voluntary administration, which is modelled on Chapter 11 bankruptcy in the United States, is rarely used with the notable exception of Whitcoulls in February 2011. Three months later Whitcoulls was purchased by the James Pascoe Group, which is owned by the Norman family.

The powers of directors and shareholders are suspended under voluntary administration and Postie Plus could be sold without shareholders having any say or receiving any consideration. Part 15A also gives the company an opportunity to try and renegotiate its long-term lease commitments.

The best outcome for Postie Plus shareholders is that they retain a token shareholding, just as shareholders do in a vehicle used for a backdoor listing. However, this is unlikely.

But the big picture lesson from Postie Plus is the continued evolution of the retail sector. The company started with retail outlets in Westport and Reefton in the early 20th century and developed a thriving mail order business, which was closed in 2001.

Postie Plus should have converted its mail order business into an internet sales operation as retail success in the future will be dependent on a combination of attractive stores and a strong internet sales business.


Brian Gaynor

Portfolio Manager

Disclosure of interests: Milford Asset Management holds Briscoe shares on behalf of clients.