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Will OSIM's Brookstone bet pay off?

THINK OSIM and the ubiquitous massage chair comes to mind. But these days, OSIM's future is increasingly being defined by its Great American Dream. That quest, however, is not going as well as hoped for OSIM, one of Singapore's most successful home-grown brands and a stockmarket favourite.

Last week, OSIM shares slid 13 per cent after the company suffered a sharp drop in quarterly earnings due to financing costs and lower revenue from recently acquired Brookstone Inc in the US.

OSIM, a maker of healthy lifestyle products, reported that net profit fell 94 per cent to $500,000 for the first quarter of this year. A combination of finance costs in the acquisition of Brookstone, and lower revenue from the US retail chain, resulted in a net loss from associates and joint ventures of $13.9 million. Excluding Brookstone, the group said net earnings were up 100 per cent at $14.4 million with core operations performing well. OSIM is keeping its guidance for revenue and earnings growth of 20-30 per cent for the whole of this year.

However, market attention remained focused on Brookstone, and rightly so, because what happens there will have a major impact on OSIM's prospects. In a bold move to enter the American market in April last year, OSIM led a consortium, including a unit of Temasek Holdings and US investor JW Childs Associates LP, to stage a US$456 million acquisition of Nasdaq-listed Brookstone. OSIM's share of the investment was US$90 million.

Productivity

The challenge, of course, is to make the investment work. And OSIM chief Ron Sim has been candid enough to admit when announcing the Q1 2006 results that he is not satisfied with how things are turning out at Brookstone so far.

The changes required are radical and represent a break from the old way of doing business at Brookstone. Until now, Brookstone has been happy to incur losses in the first three quarters of the year but then make a sufficiently large profit in the fourth quarter from Christmas sales to achieve full-year profitability. This is not good enough for OSIM, which is pushing for quarterly profitability. Productivity is also an issue. While OSIM measures productivity at both store and individual levels, Brookstone looks only at the store level, which has led to a laid-back sales culture. OSIM is now introducing an individual incentive scheme for Brookstone sales staff that it hopes would re-energise the sales force.

And leadership is an issue. Last month, OSIM brought in a new chief executive for Brookstone. Lou Mancini, a seasoned manager with over 25 years of experience in managing specialty retailing companies, now has the job of turning Brookstone round. The previous CEO, Mr Sim said plainly, was not strong enough. However, it is leaving the rest of the management unchanged.

Execution risks

It is then a full revamp of Brookstone, from the top down to the salesman on the floor. One cannot ignore the execution risks: how would the remaining members of the old management react to the new CEO? How would the sales force react to the introduction of a sales culture that is alien to them? Can these changes be applied effectively to a network of over 300 stores sprawled across the US? Are there cultural hurdles? Many Singapore companies have stumbled when it comes to the US market.

What's clear is the high stakes involved. A more profitable Brookstone - if all these efforts succeed - will give a big boost to OSIM's earnings at the group level. At another level, Brookstone's network of 303 well located outlets across the US and Puerto Rico offers OSIM a huge new market for its core products.

The early signs are promising: out of the 10 best selling products at Brookstone, three are OSIM products. And this is even before OSIM has started to push its full range of products to Brookstone's customers. But failure will see Brookstone become a major drag on OSIM's earnings, as well as deal a serious blow to OSIM's global ambitions.

An avid marathon runner, Mr Sim knows all about staying the distance. The market, however, may not be so patient. This leaves OSIM with the task of demonstrating it can turn Brookstone round in the coming few quarters.