Published June 8, 2009

RSH's income statement can be clearer

By JAMIE LEE

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RSH Ltd - which sells clothes from notable brands such as Zara, Mango and Massimo Dutti - posted a 17.7 per cent rise in net profit for the year ended March 31 to $16.15 million from $13.73 million a year ago.

Revenue inched up 5.3 per cent to $773 million from $734 million a year ago. At a time when many retailers are booking smaller profits or going into the red amid the recession, this is a pretty decent set of numbers.

However, the presentation of its income statement isn't that ideal.

Besides standard items such as revenue, 'other income', and expenses for staff costs and depreciation, the income statement includes $23.6 million for what the company categories as 'changes in value of inventories'.

RSH said that the term 'changes in value of inventories' refers to the difference between its opening stock (plus purchases) and the closing stock.

Specifically, this increase is due to the additional purchases for its 23 new stores in the Middle East, RSH said in a footnote.

Under its current assets on its balance sheets, the inventories rose to $161.3 million from $137.7 million, exactly accounting for the $23.6 million increase in the income statement.

Despite that, this accounting item is confusing at first glance.

The first question that comes to mind is why inventories are being charged under the income statement as inventories are typically reported on a company's balance sheet under current assets.

Without a thorough explanation of how the change in value of inventories is being accounted for, some would be misled into thinking that this is inflating the profit figures.

It's not.

The item listed by RSH as 'raw materials and other consumables' is the total costs of goods bought during the reporting period, including the cost of adding to its inventory of goods that may not have been sold during the same period.

Because the cost of adding to inventories is not part of the cost of goods sold during the period, the company lists this in a separate line 'changes in value of inventories'.

So the actual 'cost of goods sold' should be the cost of 'raw materials and other consumables' minus the 'changes in value of inventories'.

But RSH should explain more thoroughly how this 'change in value of inventories' is conceived in its income statement.

This is because it isn't clear to the average reader. Most investors are not trained in such complex accounting and the current financial statement isn't presented in the friendliest manner.

Instead, it has prompted questions of whether this is a reflection of a change in market value of the stock or if this is tantamount to an asset writeback.

This is plausible. For example, CK Tang sank deeper into the red in FY 2009 due to a significant $7.8 million provision for 'changes in stock of finished goods and goods-in-transit'.

This is essentially a write-down of its assets, the company said.

An explanation of this item in RSH's accounts is especially when that $23.6 million from 'the changes in value of inventories' seemed to give a significant boost to its full-year net profit of $16.15 million.

RSH's sector peers such as FJ Benjamin and The Hour Glass are calculating and presenting their 'cost of goods' as a single item on its income statement. Head of one retailer told BT that his firm presents the 'cost of goods' specifically in its accounts because it seems more straightforward.

Readers do not need to calculate backwards the actual cost of goods after considering items such as inventories, he added.

This appears to be a clearer method of presentation and something that RSH should consider moving towards.

By having common and clear financial accounts, investors would then be able to assess the retailer's strengths and weaknesses better.

RSH was formerly known as Royal Sporting House before Golden Ace - a joint venture between Dubai's Emaar Properties and Indian real estate developer MFG Group - took over in 2007.

Though RSH was once a household name, it seems to have slipped under investors' and analysts' radars today.

How its income statement is presented is certainly not the main reason, but a clearer profit-and-loss account may help in a small way to pique interest.