Forum Archive Index - February 2001

["Peter Maiden" <pmaiden@xtra.co.nz>]

The Warehouse quarterly sales release was pretty good news for shareholders. Reported revenue growth of 12.6% for the quarter and 14.1% year to date is pretty impressive.

 

Compared to the overall retail sales growth, Farmers Deka reporting small sales growth ( down 3,8% first quarter and up 5.6% second quarter) and Kmart down more than 20% one must say that WHS is still significantly increasing that all inportant share of the retail market.

 

However the releases do not tell the real story, that from a shareholder's (ie an owner's) perspective.

 

Overall WHS sales (the sales that we own as shareholders) year to date January 2001 have grown from $600M last year to $907M this year - an increase of more than 50%. I am disappointed and surprised that the company did not actually include this in their announcements.

 

Part of the increase is from Australia but isn't acquisition one of the WHS growth platforms.

 

A rough extrapolation puts WHS annual sales at around the $1.65-$1.70B mark - $1.2B coming from NZ.

 

Shares have been issued to fund the acquisition so lets have a look at the revenue / share ratio. Last years sales were $3.73 a share and this year they will be about $5.66 a share. What margins WHS achieves this year will determine the level of earnings that will achieved.

 

How does this relate to the WHS share price?

 

During 1999 the WHS price (pre profit announcements) was comfortably positioned about the 360 mark - trading at PE of about 19. Pre 2000 announcements the WHS price trade at a 530 level - a PE of 18. Post 2000 results and Australia announcement the WHS price went to 680. Based on the premise that the market was comfortable with a PE around 19 this suggested that the market valued the NZ ongoing business at around 530 and the Australia acquisition at around 50 cnets a share Since then the WHS price has been downgraded to 560 (reflecting slightly less revenue growth and stressed margins?)

 

This all makes sense. The NZ business is not coming up with any surprises. It seems, by consensus,  that traditional Warehouse margins won't be coming out of Australia for a while. The present 50 cents a share built in for Australia equates to roughly $10-15M earnings (less than 3% of reenues compared to The Warehouse 6-7% of revenues).

 

Based on this the current WHS price is most likely a fair one. Maintaining core earnings growth should see the price go up over the next year by another 10% plus form here. If the Australia operations really fire quicker than anticipated than there is still considerable upside on the current WHS price.

 

All good stuff and will keep me interested for a while yet. Warner - I hope that you got some at the 525 they went down to last week.

 

Cheers

 

Peter