Ticker:  EHF
Website: www.easternhifigroup.com
MD: Steve Allbury
Chairman: Rick Bettle
Annual meeting date: TBC  –  approximately June 2007

Shares.net.nz comment

Eastern Hi Fi listed in December 2004 having raised $5 million through an IPO
and delivered a net profit after tax of $712,000 beating forecast by $9,000.

Since that profit result the company performance has disappointed for reasons that include store expansion costs and loss of gross margin.

In 2005 EHF opened a new store in Palmerston North while purchasing two further stores giving the company 10 retail outlets. While it was intended that the purchase of existing stores would save money compared to opening new stores it appears that the refurbishment and cost in executive time was more costly than budgeted. To cope with the expansion in store numbers and new brands EHF moved to a new warehouse and office in Mt Wellington.

It seems that the company has had a difficult time in controlling the growth in costs while sales have produced a lower gross margin. There was also a problem with having to repurchase stock.
“I believe (with the benefit of hindsight) that we took opportunities as they arose, which put too much pressure on our existing management and systems,” chairman Rick Bettle told shareholders at the company’s June 2006 AGM.

The latest result from Eastern Hi Fi has shown a fall in profit to $548,000 with sales exceeding and gross margin exceeding forecasts, thus illustrating the rise in costs.

Directors while disappointed with the net profit result are confident that this year will see a substantial profit improvement with a full year of trading in the new stores and warehouse and a further investment in systems. This is despite a recognized slowdown in retail sales.

PE Comment
EHF has 10,000,000 shares on issue @ .72 giving a market cap of $7,200,000
Companies such as EHF trade on a pe of say 8-10 which would mean a profit in the region of $720,000 to $900,000.

Technical Comment
The recent result has seen a pullback in the share price from $1.00 to .70cents.
70 cents seems to be the support level pending further results.

Company comments on its latest result

Sales exceeded forecast despite a disappointing December by $1.4 million. Same store sales also increased year on year by 10% and gross margin exceeded forecast by $150,000.

However due to a number of one-off and unforeseen costs such as depreciation, legal costs and goodwill amortisation associated with the purchase of existing businesses (instead of opening new stores) and the requirement to upgrade, relocate and expand the warehouse the NPAT was been reduced from the forecast $949,000 to $548,000.

While disappointed with the net profit result, the company is confident that this year will see a substantial profit improvement with a full year of trading in the new stores and warehouse and a further investment in systems. This is despite a recognised slowdown in retail sales.

Latest financial result (full year)

Unaudited figures for the year to December 31, 2006
(Released 16 March, 2006 – figures in $NZ’000)

Recent milestones

June 2006  “The costs associated with the acquisition and restructuring of the operations of two existing stores, in place of the predicted opening of two new stores, meant considerable stock the Company had sold to those stores was repurchased and more costs incurred and expensed,” Chairman Rick Bettle tells shareholders at the company’s AGM.
“ The repurchase of stock resulted in the write back of the wholesale margin previously achieved until the retail sale occurs.”

October 2005 Eastern Hifi Group announces the following additions and changes to the groups' import and distribution division currently has the distribution rights to the following brands: Denon Consumer Electronics, KEF Loudspeakers, Polk Audio Loudspeakers, Tannoy Loudspeakers, Arcam Hifi, Musical Fidelity Hifi, Russound Custom Installation Electronics, Biema PRO Audio, Audioquest cables, Straightwire cables, B-Tech TV and Speaker brackets and stands, Goldring Accessories, and Remaco Remote Controls and Projector Screens.

May 2005 Eastern Hi Fi Group advises that its retail subsidiary, Eastern Hi Fi Ltd, has purchased the trading assets of Smith's Sound Hi Fi House Ltd, a retail store operating in Mt Eden, Auckland. Eastern Hi Fi Ltd will continue to trade that store under the Smith's Sound name utilizing the Eastern Hi Fi management systems. This takes the number or retail stores operated by the Group to nine.

Company activities

Eastern Hi FI Group Ltd is a management/holding company that owns and operates the following companies: Eastern Hi Fi Ltd (retail stores), Avalon Audio Corporation Ltd (importer & wholesaler), Pacific Audio Ltd (importer & wholesaler), Avalon Pacific Marketing Ltd (sales and marketing). The Group imports, wholesales, retails, installs and services a wide range of mid to high end Audio-Visual Home Entertainment products. The retail company, Eastern Hi Fi Limited, currently has stores at 10 locations including 4 in Auckland (1 trading as Smiths Sound Hi Fi House), and at Tauranga, Rotorua, Napier, Palmerston North, Wellington (Absolute Audio and Video) and Gisborne (Eastland Hi Fi Limited).