Daily ShareChat: The Warehouse Group

The Warehouse Group's strong annual result displayed clear evidence of a second half earnings recovery, says Craigs Investment Partners analyst Daniel Reynolds.

"Management is cautiously optimistic this momentum can be maintained in 2010 and we have upgraded our earnings estimates," Reynolds says.

He is now forecasting earnings before interest and tax (EBIT) of $129.8 million in the year ending July 2010, a 5.8% increase on his previous forecast, and EBIT of $136.3 million the following year, a 4.1% increase on his previous forecast.

"We expect a gradual volume-led sales recovery in 2010 as a domestic property market rebound and gradual macro recovery are partially offset by a weak domestic labour market and continued consumer de-leveraging."
A 2.9% growth in sales from the main "Red Sheds" in the first five weeks of the 2010 financial year point to a continued top-line recovery, Reynolds says.

However, management's caution about whether this growth can be maintained relates to the likelihood of downward price pressure from passing through the strong New Zealand dollar against the US dollar, uncertainty surrounding the macro recovery and the impact of rising unemployment and declining real incomes, he says.

Inventory planning and control, competition, consumer behaviour, product mix and the strength of the currency will all play an important role in the company's ability to maintain 2010 margins, he says.

BROKER CALL:  Craigs Investment Partners rate The Warehouse Group (NZX: WHS ) as hold.

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