Cavalier lifts FY earnings as cost cuts make up for sales drop; shares fall
Cavalier Corp., the listed carpet maker, increased annual profit before one-time items as it cut costs and benefited from improved market conditions in New Zealand, making up for weaker sales.
After-tax profit excluding one-time items was $6.6 million in the year ended June 30, up from the previous year's $4.3 million, the Auckland-based company said in a statement. That's in line with the company's guidance in June that normalised profit would be at the lower end of a $6 million to $10 million range.
Cavalier said in June it would consolidate its carpet tufting operations from Onehunga to its main site in Papatoetoe, allowing it to reduce manufacturing costs and boost future earnings.
The company took a $4.1 million after-tax charge for the relocation, partially offset by provisions of $519,000 taken up in the previous year. The costs are in line with the company's June guidance of $4 million to $4.5 million.
Cavalier has reduced its carpet brands and added its first synthetic range to meet demand. In the first half of 2013, earnings at the carpet business were crimped as it tried to sell stock where the price had been inflated by the high cost of wool. Profit margins returned to more reasonable levels in the second half of the year, reflecting lower wool prices.
"The New Zealand market was very sluggish in the first half of the year but conditions appear to be improving and in the last six months there has been increased volumes sold with improved revenues," managing director Colin McKenzie said. "There has been a considerable effort to reorganise and reshape the business in terms of the cost base, product offerings and brand strategy and we believe the company is now well positioned to lift future profitability."
In 2013, Cavalier's revenue fell 7 percent to $202 million as New Zealand sales slid 9.4 percent and Australian sales dipped 5.6 percent, the company said.
In Australia, which accounts for 55 percent of revenue, market conditions have been soft and a higher New Zealand dollar is eroding returns. An improvement isn't expected until the second half of the 2014 financial year, the company said. It expects to provide 2014 profit guidance at its annual meeting in November.
The shares dropped 6.7 percent to $1.40 and are down 11 percent this year.
"It's a pretty tough environment for them," said Grant Williamson, a director at Hamilton Hindin Greene. The stock decline was "a bit of an overreaction. The result was disappointing but not unexpected."
Cavalier expects to benefit from the rebuilding of earthquake-damaged Christchurch, and a positive outlook for the New Zealand economy, it said.
"We expect our volumes and profits to lift in line with increased domestic demand," McKenzie said.
Cavalier's assets fell by $5 million to $197 million in 2013 as the company continued to reduce inventory as part of a stock reduction programme started in 2012. The decline also reflects a $6.1 million decrease in fixed assets caused by reduced capital expenditure.