Ikea's New Outlets Are Costing It Heaps

Sydney Morning Herald

Tuesday January 29, 2008

Vanda Carson

THE Australian arm of Swedish cut-price homewares giant Ikea is throwing off cash like never before but the "big box" operator's bottom line is suffering from the high price of financing its move into larger new premises.

Record numbers of customers seeking Ikea's flat-pack furniture and accessories have boosted its revenues by 20 per cent in what is its fastest growing market in the world in terms of annual sales.

But net profit fell 84 per cent in 2006-07.

Famed for its simple design and cavernous stores, Ikea reported profit after tax of $1.9 million in the 12 months ended August 31, 2007, from operating revenue of $375 million. That compared with the previous year's net profit of $11.9 million from operating revenue of $299 million.

Despite this the consolidated entity had a deficiency in net current assets and current liabilities of $31.8 million but continued as a going concern as it intended to renew a financing facility.

The figures are contained in accounts lodged by Ikea Pty Ltd with the Australian Securities and Investments Commission on December 20.

The notoriously private furniture and accessories company declined to return calls requesting comment on its performance.

It is gambling its future on the success of its new sprawling super-stores, closing smaller shops and spending about $100 million each on single stores in each of Sydney, Melbourne and Brisbane.

Occupying more than 20,000 square metres, the super-stores are more than twice the size of their predecessors.

The cost of borrowing to build and stock these stores is taking its toll, with financing costs almost wiping out profit.

Without the borrowings the company would have posted a profit of $42.3 million.

Financing costs have blown out to $39.9 million in 2006-07 from $5.2 million in 2005-06. Most of this is a mysterious "payment under risk agreement" of $32.4 million, according to the accounts.

Meanwhile, current borrowings have grown from $14 million to $49 million in the past year to pay for the new buildings, with total borrowings reaching $127 million.

With the high cost of borrowing, the company paid just one tenth the amount of tax it paid the previous year - $584,000 compared to $5.1 million.

Ikea has closed smaller stores in Moore Park and Blacktown and consolidated them in Homebush Bay, which opened three years ago.

Staff numbers are also on the increase, with the company employing 12 per cent more staff than a year ago, 1068 compared with 954.

A new $150 million Melbourne store in the south-eastern suburb of Springvale - 30 per cent larger than Homebush at 32,000 square metres - is set to open by the end of this year.

There are plans for up to another 10 stores on the east coast in coming years.

The company sells its goods with a profit margin of just 0.5 per cent, while other retailers expect between 4 per cent and 6 per cent.

The parent company has 270 outlets in 36 countries with plans for another 25 stores worldwide this year. It racked up $US28.9 billion ($32.9 billion) in global sales in the year to August 31.

© 2008 Sydney Morning Herald

Back to News Index | Back to Home