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JK Kids failure a symptom of headwinds facing NZ clothing retailers from internet rivals

JK Kids decision to close after 18 years is a symptom of ongoing headwinds faced by New Zealand clothing retailers from international brands via the internet and consumer preference for discount stores and hand-me-downs, a top analyst says.

Christchurch-based JK Kids yesterday cut all of its stock to half price in a closing sale, saying it faces increased competition from online retailers overseas.

"I have always had quite a cynical view on that whole sector, so I think it just reinforces how awful things are," said Sarndra Urlich, who follows retailers for brokerage First NZ Capital. "This whole online thing has really threatened that sector and people who are savvy, which is most people these days, know how to buy stuff online cheaply."

The New Zealand stock exchange's Consumer Index of 18 stocks has edged up 2.6 percent the past year, lagging a 16 percent gain in the 113-member All Ordinaries Index in the same period. In more straitened economic times, consumers are likely to put money into their mortgages and spend less on apparel, said First NZ's Urlich.

Spending on clothing, apparel and footwear dropped 7.4 percent in the September quarter, according to government figures, and has fallen for five of the last eight quarters. In contrast, prices in the overall retail index have declined just once in the past eight quarters.

Urlich says the same headwinds face children's clothing retailer Pumpkin Patch and Hallenstein Glasson Holdings which operates the womenswear chain Glassons, menswear label Hallensteins and fashion brand Storm.

"I have thought for a long time that their business is structurally under threat from the internet, mostly because I see young women in their 20s or teenagers buying stuff from ASOS or Boohoo or whatever and circumventing the likes of Glassons," Urlich said. "Unless you have got a strong international brand, I think that whole physical store concept is very much under threat."

ASOS and Boohoo are online retailers.

"The whole concept has become very commoditised and disposable," she said. Shoppers are now exposed to a variety of design options, and are also shopping at discount department stores or taking advantage of hand-me-down children's clothing.

Urlich downgraded her recommendation on Pumpkin Patch to 'underperform' from 'neutral' in a report last week, citing comments at the annual meeting that there had been no reprieve from challenging conditions and earnings faced downside risk. She cut her earnings expectations by more than 20 percent for each of the next three years, pulling down the brokerage's 12-month target for the stock to 80 cents a share from $1.15.

Urlich has an "underperform' rating on Hallenstein Glasson, a 'neutral' recommendation on outdoor clothing and equipment retailer Kathmandu Holdings and 'underperform' on discount department store Warehouse Group, according to Reuters data.

Shares in Pumpkin Patch advanced 3.5 percent to 88 cents and have slipped 31 percent the past year. Hallenstein slipped 1.6 percent to $4.43 and have declined 16 percent the past year. Kirkcaldie & Stains last traded at $2, having declined 35 percent the past year while Postie Plus Group last traded at 9 cents and is down 61 percent the past year. Warehouse advanced 0.8 percent to $3.77 and has gained 17 percent the past year.


Comments and questions

Who would have thought the WHS would outperform the others? Personally, I think there is a real risk the WHS are just buying market share with their refurb strategy and discounting. The telling point is that despite the refurbs they are still going backwards at the gross margin level. You have to wonder whether the business case for the refurbs make sense? Or are they just buying themselves time to delay the inevitable?

This is a real shame because JK Kids produce good quality clothing in a variety of designs at reasonable prices. I like the way they use a lot of natural fibres. The clothes last the distance too.

Times may be tough but children still need clothes to wear. That just leaves parents with 3 alternatives:

1) Designer labels - um beyond budget for most of us
2) Cheap stuff - mostly rubbish but occasionally find something good just won't be able to hand it down cause it won't last that long!
3) Spend more time online browsing overseas websites looking for affordable reasonable quality clothing

For me probably a combination of 2 and 3.

Goodbye JK, so sad to see you go :-(

And another issue is duty and GST not paid on low value imports, or misdeclared at the border. The current Customs system is hugely unfair to local retailers in this regard. Deaf ears all round...

Sure is hard to know whether that blue dress or yellow shirt is going to look good on me by starring at it and buying it online.

I think the prediction of the demise of the physical clothing store is greatly exaggerated.

This business had obviously carved itself a niche in the market place and had done well, but it has responded poorly to the changing market enviroment. What I find it hard to get my head around, is why management has not been proactive and estabished an agressive, on line market presence?

The issue with the GST threshold limit at the border is also a red herring. Years ago when I had established one of the biggest fashion mail order businesses in Australaia (in a period of less than 2 years and which I operated from my home), I use to have my consignments shipped to me from the UK where the value of the consignment(s) for the most part, were below the threshold limit. I also exported a lot of the garments to Austrailan customers, so if I did end up paying GST from time to time, I would invariably claim it back through export.

Businesses need to get creative and use the law(s) to their advantage, and quit complaining.