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Warehouse 1H profit climbs 12% as financial services exit starts paying off

Tuesday 19th March 2019

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Warehouse Group lifted first-half profit 12 percent as retailer's exit from its ill-fated financial services division starts paying off in a wider transformation of the group. 

Net profit rose to $35.8 million in the 26 weeks ended Jan. 27 from $31.9 million a year earlier. That included a smaller loss of $1.6 million from its discontinued finance operations, compared to a $3.5 million loss a year earlier. 

Stripping out $2.2 million of restructuring costs and the exited financial services unit, underlying earnings rose 5.9 percent to $37.4 million, and Warehouse anticipates annual earnings will be $63-66 million. That compares to earnings of $59 million in the 2018 financial year. 

Sales rose 2.7 percent to $1.64 billion. The Christmas and New Year sales period was mixed for the retailer, with its flagship 'Red Sheds' stores posting a 0.3 percent decline in second-quarter sales, while its Noel Leeming consumer electronics and appliances lifted sales 6.5 percent in the period. 

Gross margins shrank 20 basis points to 32.5 percent with improvements in the Blue Shed stationery stores and Torpedo7 Group offset by the Red Sheds. Noel Leeming margins were flat. 

Chief executive Nick Grayston said the improved result was in spite of a flat Christmas and New Year trading period. 

"While Christmas remains one of New Zealand’s most important family celebration and shopping occasions, we noticed a change in customer shopping trends, particularly around Black Friday sales," he said in a statement. 

“We had our biggest Black Friday sales ever in November across all our brands and our biggest Boxing Day in Noel Leeming. We are closely monitoring how these trends affect Christmas trading going forward." 

The company noted a flat Christmas trading period for the wider retail sector, while a cold start to November and December affected sales of apparel, sporting and cooling goods.

It also acknowledged the looming entrance of Ikea as demonstrating "continuing disruption in our market and opportunities others see in New Zealand."

Warehouse has been attempting to adapt to that 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. 

The retailer also said reducing consumer confidence and rising cost pressures are a potential headwind for its second half. 

Grayston has been tasked with returning the business to growth under an 'Everday 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. 

The board declared an interim dividend of 9 cents per share payable on April 12 with an April 2 record date. That's down from 10 cents a year earlier. 

Warehouse lowered its guidance for capital spending to $65-85 million for the current financial year from earlier guidance of $80-100 million, with the bulk of that falling in the second half of the year.

Some 45 percent of that will be on stores and distribution and 39 percent on information systems. Capital spending was $28.2 million in the first half, down from $38.9 million a year earlier. The company had 93 Red Sheds and 70 Blue Sheds at Jan. 27, unchanged from a year earlier. The retailer closed two Noel Leeming stores, leaving it with 77, and opened seven Torpdeo7 stores, taking that chain to 18. 

Warehouse is reviewing its mid-term strategy and will update investors at its annual earnings results later this year. It said it's investing in its digital capabilities and is creating a new platform. It expects to make an announcement on the new platform in the June quarter. 

The shares last traded at $2.08 and have increased 0.5 percent over the past year. 


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