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Investors await Christmas trading for Warehouse turnaround strategy

Friday 7th September 2012

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Investors want to see how Warehouse Group fares over the peak Christmas season before judging its turnaround strategy, after the biggest retailer on the NZX 50 Index met guidance with a 14 percent drop in 2012 earnings. The stock fell today.

Profit before one-time items was $65.2 million in the 12 months ended July 29, down from $76 million a year earlier, the Auckland-based company said in a statement. Sales rose 3.9 percent to $1.7 billion. That's in line with the retailer's May forecast of an adjusted net profit after tax of $62 million to $66 million.

The shares fell 5 cents to $2.85. Analysts had been expecting the Red Shed to better its guidance with earnings of $68.2 million.

Last year, Warehouse launched a strategy to reverse a seven-year decline in same store sales, including creating a clearer brand and what it called "a better approach to product, price and promotion and improved store experiences". The company expects retailing to face "mixed" trading conditions in 2013, with earnings "significantly influenced" by its Christmas and January trading performance.

"The jury is still very much out on their turnaround strategy," Matthew Goodson, portfolio manager at BT Funds Management, told BusinessDesk. "It is a question of whether they are going to get a sufficient return on the money they are spending - there is nothing in this result to change that question mark."

Warehouse shares have gained 15 percent in the past three months and were bid up ahead of today's results. The stock is rated a 'hold' based on the consensus of eight recommendations compiled by Reuters, with a price target of $2.68. The company kept its final dividend unchanged at 6.5 cents.

The retailer's operating margin shrank to 5.6 percent from 6.8 percent, with the bulk of the contraction coming from its Red Sheds, where the margin shrank 150 basis points to 5.3 percent. Warehouse said adjusted profit will grow in 2013 though it was too soon to give specific guidance.

The groups Warehouse Stationery chain had a 2.6 percent gain in sales to $206.6 million while operating profit declined 2.6 percent to $9.8 million. Same-store sales rose 3.3 percent.

Inventory across the group rose to $309.4 million from $262.7 million. Operating cash flow fell to $44.5 million from $96.9 million a year earlier, reflecting "increased investment in inventory to improve in-store stock availability and support growth categories," it said.

In the latest period, the company recognised a gain of $18.2 million from the sale of property and $7.3 million from the release of warranty provisions.

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