Friday 26th July 2019
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Warehouse Group's efforts to revive flagging growth are showing "encouraging signs" after the retailer upgraded its earnings forecast, says research house Forsyth Barr.
The retailer yesterday said better trading and gains from its transformation programme mean adjusted profit after tax will beat the previous guidance of $63-$66 million in the year ending July 28, and it now expects to report adjusted profit of $67-$70 million, up from $59 million a year earlier. The improvement was due to a better trading performance and benefits reaped from the transformation programme.
The company said earnings might be even higher because it doesn't expect to pay the full amount of its short-term incentive scheme.
Warehouse also said its balance sheet is stronger, with net debt expected to be $60-$80 million at the balance date, down from $153.1 million at the first-half update. That's due to better management of working capital and inventory levels, it said.
"Warehouse is in the early stages of its business transformation but continued operational/sales improvement and working capital gains are encouraging signs of execution," Forsyth Barr analyst Guy Hooper said in a note.
However, Hooper said it's still early days for the transformation programme, which seeks to strip out complexity in the business and make it a more flexible operator.
The stock climbed 4.7 percent to $2.21 yesterday, its highest close in about two years. It's rated an average 'hold' based on four analyst recommendations compiled by Refinitiv, with a median price target of $2.03. It last traded up 0.9 percent at $2.23.
Warehouse has been attempting to adapt to the changing retail environment in which online purchases have undermined the traditional 'bricks and mortar' networks. That's included some unsuccessful forays into new lines of business, such as its attempt to build a consumer finance arm to complement its core business.
Chief executive Nick Grayston has been tasked with returning the business to growth under an 'Everyday Low Prices' model rather than relying on traditional discounting. He's also integrated the back-office operations of the group's various businesses to cut costs.
Like many traditional retail chains, Warehouse shifted more sales to online channels, and its new digital platform was in its testing phase in the fourth quarter.
Hooper said the online platform - TheMarket - is due to launch in early August, and will sell mostly Australian and New Zealand brands "which we understand will offer customers loyalty benefits and provide an additional subscription based service".
He noted risks to the business include the New Zealand expansion of Wesfarmers-owned Kmart and entry of Amazon into Australia. However, the company's physical network and strong brands - which include Warehouse 'Red Sheds', Warehouse Stationery, and Noel Leeming - give it a good position.
At its first-half update, Warehouse said it will update investors on its mid-term strategy at the annual result.
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