Like Lewis Carroll's Cheshire Cat, Pacific Brands appears to be disappearing. The company might need to downsize itself until it simply isn't there at all.
The latest piece of the PacBrands cat to disappear is its workwear division.
A cashed-up Wesfarmers knocked on the door, PacBrands responded, and the business and iconic brands including King Gee and Hard Yakka have gone to Wesfarmers' Industrial and Safety division for $180 million.
PacBrands said on Tuesday that its chief financial officer, David Bortolussi would be the group's new chief executive in place of John Pollaers, who departed in July after opposing asset sales.
Mr Bortolussi gave his first presentation as chief executive on Tuesday morning, and unlike former Foster's boss Mr Pollaers, comes into the job as an insider. PacBrands' problems are daunting regardless of who is running the company, however.
The workwear division services companies in sectors of the economy that have been in retreat. Its earnings before interest and tax fell by 41 per cent to $22.1 million in the June year, with PacBrands citing lower demand in the manufacturing, mining and construction sectors, as well as tight corporate and government budgets generally.
The price Wesfarmers paid was accordingly modest, at 8.1 times the workwear division's 2013-2014 earnings before interest and tax.
It was still enough to persuade PacBrands to let the business go as it focuses on increasing direct sales to consumers, and invests in two brands in particular, Bonds, an underwear product line that generates about half of the group's revenue, and Sheridan, a range of bed linen, towels and home accessories.
Bonds and Sheridan could conceivably sit at the heart of a downsized group that has an earnings base, prospects for growth and a future. It is the destination that PacBrands appears to be driving towards.
On the strength of the June year result it is not possible to declare that any part of PacBrands' portfolio is a definite keeper, however.
Sales rose 3.8 per cent in the year to June but PacBrands only got there by subsidising sale prices at the wholesale level. It did not get the sales boost it expected the strategy to deliver, and suffered a 25 per cent slide in earnings before interest and tax.
Margin pressure was intense, and widespread. The underwear division that houses Bonds and other famous brands including Berlei and Jockey lifted sales by 7.7 per cent, but saw earnings before interest and tax fall by almost 19 per cent, for example. The workwear division's 41 per cent slide in earnings before interest and tax came despite a 1.6 per cent sales increase, and Sheridan-Tontine posted a 12.1 per cent rise in sales, and a 21.5 per cent fall in EBIT.
PacBrands' other profit and balance sheet metrics were also problematic. Its cost of doing business rose by 5.5 per cent, for example, and its net working capital increased by almost 18 per cent as unsold stock piled up.
Net debt rose from $159.1 million to $249.1 million, and as a percentage of shareholders equity rose from 21.6 per cent to 55.5 per cent.
Investors were warned on June 10 that a drab result was coming. They drove PacBrands' shares down by 9 per cent to 51 cents on the day.
On Tuesday, after the release of a profit report that was as bad as expected but not markedly worse, they were calmer, and even slightly upbeat. In a flat market, the shares were as much as three cents higher at 60 cents at one point, and closed one cent higher than Monday, at 58 cents.
As Mr Bortolussi, chairman Peter Bush and adviser Macquarie Capital consider strategic options, the question is whether PacBrands is being priced for resurrection, or a breakup.
Citigroup analyst Craig Woolford has a 60 cents a share target and a buy rating, but says that his "core thesis is the potential value realised through asset sales," with the the sale of workware division to Wesfarmers representing the first step.
PacBrands will brief shareholders about its strategic review at its annual meeting on October 14, but its strategic framework is already in the public domain.
The group intended to strengthen its balance sheet, invest in the development of its two best brands, Bonds and Sheridan, stabilise profit margins, control costs, decentralise itself and "review and explore options to simplify the business and maximise shareholder value," Mr Bortolussi said on Tuesday.
The main investor interest is going to be the simplification project and how far it goes – on whether a business that hives off assets and concentrates on Bonds and Sheridan is actually worth supporting.
The June 30 reports suggests that PacBrands' best brands are relying more heavily on price cuts to fend off lower-priced competition and maintain market share.
Mr Bortolussi and the board would obviously prefer to fix that problem and hang on to their best brands and businesses. They know renovated properties are worth more than unrenovated ones.
If margin erosion in the big brands continues, however, it could be that PacBrands will deliver the most value to its shareholders by pursuing its Cheshire Cat vanishing act to its conclusion.