Warehouse moves upmarket

By David McEwen

Friday 22nd November 2002

When I wrote about The Warehouse Group annual report a year or two ago, I said it was just like its stores: "plain, red and cheap." That certainly isn't something that can be repeated about the latest annual report.

The company has jimmied open the cheque book to produce a high-class bit of design, complete with full colour pictures and illustrations that leap out of dropped shadows. Gone too is the red ink that seemed to have been applied with a paint brush in previous reports, replaced with silver and white pages and modern typography.

All this might be related to its increasing exposure in Australia and a desire to present a more corporate image. Or perhaps The Warehouse decided its report no longer needs to deliver a bargain basement product, even if its stores do.

Another explanation is that the company is splashing out to celebrate the 20th anniversary of the opening of the first Warehouse store in Takapuna on Auckland's North Shore.

The report is not above some bouts of nostalgia. It describes what happened after The Warehouse opened its first store in 1982.

Its tacky adverts in the Auckland Star attracted so many customers that retailers in Takapuna took legal action to close it down. They argued that The Warehouse had an unfair advantage because it had set up in an industrial zone and was therefore paying considerably less rent than the competitors.

"The first Warehouse was no more than a tiny business, located in a retail backwater, being run on a shoestring," notes the annual report. "Hardly a threat, it would seem, to the established retailer."

But what the competitors had spotted, and frightened them to death, was a killer concept: a destination store trading in a cheap location that customers would drive to. This gave it then, and still does, a cost and pricing advantage, which grew larger as sales volume was added to the formula.

Twenty years later the one store has grown to 234, producing sales of $1.86 billion. Earnings before interest and tax rose 25.7% in the year to end July 2002, on an 11.9% increase in turnover, indicating the growth rate remains high for a company with its size and market penetration.

It's not just the growth, but the quality of earnings that impresses.

Net operating cashflow has doubled from $61.8 million in 2001 to $112.5 million this year. The operating margin which indicates how efficiently a company is converting sales into profit increased from 7.3% to 7.9%.

In New Zealand that margin improved from 9.8% to 10.4% and its newly acquired Australian businesses from negative 0.4% to positive 0.6%.

There are clear signs that the Australian businesses it acquired and rebranded a couple of years ago will succeed after a shaky start.

This has large implications for The Warehouse, which has 120 stores in Australia contributing $476 million in sales but only $2.6 million in operating profit. The earnings potential in the Australian chain, when it reaches an acceptable industry operating margin, is substantial.

The annual report contains a smaller, four-page lift out report on the Tindall Foundation, the charitable trust set up by Warehouse founder Stephen Tindall to fund community initiatives, provide small business loans for strugglers and donate to many other causes.

In itself, it makes fascinating reading. If measured by asset value, this charitable trust is the same size as Sky Network TV, with total assets of $489.8 million. Of that total $466.2 million is held in shares in The Warehouse donated by Mr Tindall, a huge portion of his wealth. Annual donations from the Tindall foundation exceed $7 million.

The Warehouse is one of few New Zealand businesses that can claim to have a "values"-based culture, and mean it. Moreover, it has shown that high values and high profits can indeed go hand in hand, even if its annual report no longer slavishly reflects its penny-pinching culture.

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