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Sales slump exposes Warehouse

By Nick Stride

Friday 9th May 2003

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The Warehouse risks making heavy losses in Australia if a shock third-quarter sales slide continues.

Sharebroking analysts were caught on the hop by last Friday's hefty downgrade in July-year forecast profit, which came nine months into the financial year.

Some feel they were led astray by the company, which talked up Australia's prospects at the interim results briefing on March 10.

"They have a high fixed-cost structure over there ­ labour, rents, etc ­ so if sales come off that'll go straight to the ebit [earings before interest and tax] line," said one analyst, who didn't wish to be named.

"That could turn into pretty nasty losses."

The Red Shed operator slashed its 2003 net earnings forecast to between $73 million and $80 million, from $90-95 million.

It warned weaker than expected sales growth and lower margins would result in an operating loss but said a review had shown the long-term prospects for the business remained positive.

The shares immediately fell $1.45, wiping $443 million from the company's market value.

Although some of that fall has been recovered this week the company is worth almost $1 billion less than it was last June, raising the prospect of a big asset value writedown at year-end.

The big surprise was the speed with which Australian sales growth has fallen.

At the interim result chief executive Greg Muir reported February sales grew by 11.5% in Australian dollar terms. For the second quarter ending in January the growth rate was 20%.

"So we knew sales weren't that flash but he said don't read too much into one month's figures," one analyst said.

The figure for the April third quarter was 10.8%, "so you don't have to be Einstein to figure out they had a pretty bad March and April," the analyst said.

Brokers have cut their profit forecasts in line with the company's guidance but most remain supportive.

"We still have confidence in the management," Stephen Wright of ASB Securities, said.

"Time will tell."

UBS Warburg now expects net earnings of $79.7 million for the 2003 year and has also cropped its forecasts for 2004 and 2005.

ABN-Amro expects a result of just over $73 million while Citigroup Smith Barney is forecasting $75.3 million, down from $89.4 million just before the company's warning.

The latest share price slump follows a heavy fall in February driven by disappointing 3.2% second quarter sales growth in New Zealand.

That picked up in the latest quarter, to 8.1%.

The Warehouse paid $A118 million in 2000 for the Clint's Crazy Bargains and Silly Solly's store chains. A further $A11 million is payable if the stores meet earnings targets by the end of this year.

Analysts said the key question for Australia was the level of repeat business the company could generate.

In the two years since the Australian launch many of the acquired stores have been rebranded and outlets have been opened at new sites.

That would have drawn shoppers to check out the new offering but it remained to be seen if they would come back.

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