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Warehouse 1Q sales drop 1.7% as discount stores change to 'everyday low pricing' model

Thursday 9th November 2017

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Warehouse Group's first quarter sales were weaker than the year-earlier period after the retailer changed the pricing strategy at its flagship 'red shed' discount department stores to "everyday low pricing".

Sales fell 1.7 percent to $645 million in the first quarter ended Oct. 29, the Auckland-based company said in a statement. The Warehouse discount department stores posted a 5.2 percent decline in sales to $357.9 million while Warehouse Stationery sales dropped 7.2 percent to $59.1 million. In contrast, sales at its Noel Leeming appliance and technology chain lifted 6.3 percent to $195.1 million, while Torpedo7 sports goods sales increased 3.7 percent to $39.2 million.

Under the leadership of chief executive Nick Grayston, who took over from Mark Powell in December 2015, Warehouse has embarked on a three-year strategy to lift profitability by removing the complexity and cost of an inefficient operating model and reshaping the company's physical footprint to support the digital business. Grayston said today that weaker sales at The Warehouse in the first quarter had been an anticipated effect from the company's transition to the 'everyday low pricing' (EDLP) model as it lowered prices across its ranges.

"The reduction in first-quarter group sales was anticipated under the EDLP strategy in The Warehouse which continues to show encouraging results at gross margin level," Grayston said. 

Almost all categories were using the model by the end of the quarter and gross margins at The Warehouse were similar to the same period last year, reflecting a mix of generally higher margins on 'everyday low pricing' ranges combined with clearance activity as discounted ranges were exited, he said. Volumes of product sold increased 7 percent, in part reflecting the success of its 'dollar deals' programme for groceries.

While The Warehouse continued to trade well in the apparel category, with sales and margin increasing from a year earlier, some seasonal outdoor categories such as gardening, outdoor furniture and BBQs were impacted by the wet weather in the early part of Spring, the company said. 

Grayston said he was disappointed with the performance of Warehouse Stationery which he attributed to a systems integration between it and The Warehouse during the quarter.

"This change caused some disruption to the business, particularly in stock availability which impacted sales in the quarter," the company said. Some high-value sales categories including computer products and communications underperformed during the quarter, contributing to the sales decline, it said.

Still, gross margins increased as the sales mix changed towards higher margin categories and the Stationery business is expected to return to normal trading levels as the business heads into the critical Christmas and Back to School periods, it said. 

The company added one Noel Leeming store in Auckland during the quarter, and the chain reported strong growth in the communications, audio and whiteware categories.

Its Torpedo7 unit had strong sales at its physical stores and through the 1-day segment, partially offset by decline online sales, particularly in the Australian market, it said. 

Warehouse Group said its online sales increased 9.2 percent to $46.6 million from a year earlier, and now make up 7.2 percent of all sales.

The company ended the quarter with 93 The Warehouse stores, 78 Noel Leeming stores, 69 Warehouse Stationery stores, and 11 Torpedo7 stores. 

Warehouse Group didn't provide an earnings outlook with today's release and has previously said it expects to provide an annual forecast at the end of its second quarter.

Its shares last traded at $2.10 and have shed 29 percent the past year.


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