Woolworths - a test of character for suppliers

Things certainly turned bad for Woolworths with its plunge into
administration last week after what seemed an endless struggle for survival. But
spare a thought for its poor suppliers who are facing a not so happy Christmas
of their own. One such supplier is
Character Group the
maker of toys based on famous TV series including Doctor Who.

What’s happened?

For manufacturers like Character, there is no Tardis to step into for a trip
to more benign economic times. Times are tough and they don’t look like they’re
getting better. Indeed, analysts were warning in the summer that trading was
going to be bad.

Then, last week, Characters’ own Finance Lord, Kiran Shah, noted that the
business was experiencing ‘substantially lower than expected sales’ in the run
up to the festive period. This was just a couple of days before Deloitte took
over the running of Woolworths, one of Character’s key outlets. Those comments
apply to the year ending August 2009. This year’s pre tax profits had already
been downgraded from £8m to £5m.

What’s happening next?

Character was expected to report annual results this week but the inescapable
truth is that going forward the business is very much reliant on what happens
over Christmas ­ and that doesn’t look good.

Woolworths is a key indicator of where things are. In many instance retailers
would argue to be held back from administration until after Christmas, to see
how things go, but things at Woollies were too bleak for that.

The analysts looking at Character began downgrading expectations for 2009 as
along ago as the summer, but Shah’s recent comments signal that expectations
will need reviewing yet again.

What to do? Character’s business is buying licenses to make toys, Doctor Who,
Scooby Doo and Disney characters being among their current products. Shah will
be hoping for some new impetus to see sales in the current lines take off. The
other hope is that Character can win the licence for a highly lucrative new TV
figure. But that rather relies on the TV producers getting their acts together
to put out something that children can’t resist.

Having said that Shah will feel fairly confident about the shape of the
balance sheet. In the middle of this year there was around £12m of cash in the
bank with the current ratio reaching about 1.6, give or take a bit. That’s a
nice cushion to have for the time being. But if the downturn lasts, it’s
difficult to know just how long it will take to burn through that.