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Warehouse pays biggest dividend in 5 years after lifting annual earnings 26%

Wednesday 25th September 2019

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Warehouse Group will pay its biggest dividend in five years as efforts to turn the ship around have started paying off with a 26 percent lift in annual underlying profit. 

Adjusted profit, which strips out one-off and non-operating items, rose to $74.1 million in the 52 weeks ended July 28 from $59 million the previous year and was in line with the company's upgraded guidance provided in August. Sales rose 2.6 percent to $3.07 billion and gross margin improved to 33.5 percent from 33.1 percent a year earlier. 

The company reported a statutory net profit of $65.4 million, up from $22.9 million a year earlier which included a $25.6 million impairment charge on its Torpedo7 business. 

The board declared a final dividend of 8 cents per share, payable on Dec. 5 with a Nov. 21 record date. That takes the annual dividend to 17 cents, 1 cent higher than a year earlier and the biggest payment in five years. 

Chair Joan Withers said the retailer could have slashed costs two-and-a-half years ago in a non-strategic way to bolster short-term returns. 

"Instead, the group has focused on effecting sustainable improvement and doing the right thing for the longevity of the business, for our stakeholders and our shareholders in the long term," she said in the annual report. "The balance sheet is now in excellent shape and the business has some exciting growth opportunities ahead."

Warehouse has been attempting to adapt to the changing retail environment in which online purchases have undermined the traditional 'bricks and mortar' networks. That's included some unsuccessful forays into new lines of business, such as its attempt to build a consumer finance arm to complement its core business.

Chief executive Nick Grayston has been tasked with returning the business to growth under an 'Everyday Low Prices' model rather than relying on traditional discounting. He's also integrated the back-office operations of the group's various businesses to cut costs.

“Our strategy of fixing the retail fundamentals and investing in the digital future is showing promising signs of delivering results in terms of profit, revenue growth and customer behaviour, and remains unchanged," Grayston said.

"An important part of this is developing a customer ecosystem that will provide solutions for our customers’ changing expectations and savvier shopping habits."

Group online sales rose 18 percent to $239 million, accounting for 7.8 percent of all sales. That was up from 6.6 percent a year earlier. 

The retailer launched its digital platform - TheMarket - last month as part of that strategy. It expects the platform to generate an operating loss of $14-17 million in the current financial year while it continues to develop the offering and builds scale. 

Warehouse said it would consider providing earnings guidance for the current year after second-quarter trading, which captures the Christmas and New Year period. However, it expects higher wages, more expensive fuel, and a weaker currency to weigh on the outlook. 

The company cut net debt to $76.2 million as at July 28 from $162.3 million a year earlier, reducing its gearing ratio to 13.6 percent from 25.3 percent. The retailer is targeting a gearing ratio of less than 30 percent over the next three years when it expects average capital spending of $100-120 million. Capital spending was $61.3 million in the July 2019 year. 

Restructuring costs were in line with guidance at $15.7 million in the year, up from $8.7 million a year earlier. The company expects further costs of $18-20 million in the first half of the current year. 

The flagship 'Red Sheds' stores reported a 19 percent increase in operating profit to $85.1 million with sales up 0.6 percent at $1.71 billion. Grayston said the transformation programme played a large role in improving inventory management and keeping costs under control. 

The stationery arm lifted earnings 57 percent to $16.7 million on a 1.8 percent increase in sales to $268.6 million, with print and copy, and furniture categories performing strongly for the unit. 

Noel Leeming's operating profit rose 22 percent to $38.1 million on a 5 percent lift in sales to $924.6 million, and Grayston said he sees "significant continued growth opportunities within the Noel Leeming and commercial businesses."

Torpedo7 operating loss widened to $7 million from $1.4 million due to costs from expanding the store network. Sales were up 5.6 percent at $172.5 million, but Warehouse said gross margin was below expectations at 23.1 percent. 

The shares gained 1.7 percent to $2.35 on the open,  near a two-and-a-half-year high. The stock shed about a third of its value in the first three months of 2017 when Grayston started shaking up the organisation and at a time when online giant Amazon set up an Australian outpost, posing a bigger threat to the local retailer. 


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