Published February 19, 2009

OSIM gets rid of the Brookstone around its neck

$77m write-off puts lifestyle products group in the red to tune of $99m for 2008

By JOYCE HOOI

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(SINGAPORE) Almost four years after it sought a global stage by acquiring Nasdaq-listed Brookstone Inc, OSIM International is taking a curtain call in the form of a $77.31 million write-off on its troubled investment.

Mr Sim: The way forward is to focus on key products and cost efficiency

The write-off brings the group's net loss for FY2008 to $99.44 million against a profit of $3.13 million for FY2007.

For the fourth quarter, the group reported a net loss of $73.24 million compared to a net profit of $30.17 million a year ago.

Excluding the Brookstone-related loss, the group would have reported an after-tax profit of $15 million for the financial year ended Dec 31 - an 18 per cent increase year-on- year.

'Due to the uncertainty about the market for the rest of the year, the conclusion was that we should bite the bullet and start over,' said Ron Sim, the lifestyle products group's founder and chief executive.

'Conservative prudent accounting dictates that we make a one-off non-cash impairment for our investment in Brookstone, writing its value in our books to zero,' he said.

While OSIM will retain its 55 per cent interest in Brookstone - for which it had borrowed $100 million to acquire - the write-off has no impact on the group's cash flow and OSIM is free of future obligations towards Brookstone. It will also no longer have to account for any future share of losses.

Leading a consortium that included a unit of Temasek Holdings in late 2005, Mr Sim had then been upbeat about OSIM's acquisition, despite the US-based specialty retailer's propensity for making losses during the first three quarters of a year.

He had told BT in 2005 that despite Brookstone's second-quarter losses for the year, they were 'still pretty bullish on the company because the US lifestyle gifts business always concentrates on the last quarter'.

But now, it has been this last quarter of 2008 that has proven the final straw for OSIM, as Brookstone's margins were squeezed.

'The whole US market took a beating, especially in the last quarter of 2008. Retailers had to heavily discount inventory in order not to be left sitting on it, and that affected Brookstone's margins and earnings before interest, taxes, depreciation and amortisation (Ebitda),' said Mr Sim.

After watching OSIM's profitability gyrate in tandem with Brookstone's quarterly volatility since the acquisition, Mr Sim remains adamant that it will emerge stronger as a brand.

'We do not believe that the US market will be able to recover in the next 12 months,' he said.

2008 was not any kinder to OSIM's total turnover either. Across all three of its geographical segments, revenue declined year-on-year by 12.8 per cent overall, from $523.67 million to $456.66 million and was attributed to worsening global economic conditions.

Its non-Asian markets took the largest hit in sales, with a 23 per cent decline from $91.6 million to $68.4 million.

Business in the North Asian and South Asia segments proved more resilient.

In North Asia, sales declined by 11 per cent from $251.8 million to $225.2 million while in the South Asia segment, sales fell by 10 per cent from $180.3 million to $163.1 million.

The North Asian and South Asian markets respectively account for 49 per cent and 36 per cent of the group's revenue.

Losses per share stood at 13.52 cents for the quarter and 18.35 cents for the year, against earnings per share of 5.57 cents and 0.58 cent for the same periods respectively a year ago.

Unfettered by the profit vagaries of Brookstone, the group's outlook for FY2009 is a cautiously optimistic one.

'Barring unforeseen circumstances, the group expects profit after tax in FY2009 to be higher than the previous year,' said Mr Sim.

To make this a reality, OSIM is looking East instead of West this time.

'China is an infant market with an emerging economy. We plan to open another 20 Richlife stores this year in China through Global Active,' said Mr Sim. This will bring the number of Richlife stores - a health supplements chain - in China to 30. Global Active is a nutrition products subsidiary of OSIM's.

Last year, OSIM's sales in China were plagued by copies of its products in the market.

To boost revenue, OSIM is also counting on the launch of new products like the uSqueez Warm and the uDream, a massage chair.

'The market might have shrunk but it has not disappeared. The way forward is to focus on cost efficiency and key products,' said Mr Sim.

OSIM's share price closed at 5.5 cents, down half a cent yesterday.