Results Slightly Disappointing from Warehouse Group

Warehouse Group Limited (The) WHS-NZ| Results Slightly Disappointing from Warehouse Group; Higher 2014 Costs May Pinch Profit Growth

Morningstar Recommendation: Hol

Nachiket Moghe, CFA, Morningstar Analyst  - 64 9 915 6776   

The Warehouse Group reported underlying net profit after tax, or NPAT, of NZD 73.7 million, around 3% below our forecast and 13.8% above the same period last year. The strong double-digit growth mainly reflects acquisitions. Excluding acquisitions, we believe like-for-like profit growth was around 7% in fiscal 2013. Same-store sales of 2% for the firm's core Red Sheds division was underwhelming. In addition, operating earnings and margins were slightly lower than our expectations, as the firm invested in its multi-channel initiative, to position that business for growth

We are lowering our fiscal 2014 forecast to NZD 80 million from NZD 83 million as we see the company continuing to invest in its multi-channel business over the next 2-3 years, which will result in higher operating costs. We expect modest same-store sales growth in fiscal 2014 and slightly higher gross margins from better product sourcing. Overall we retain our view that The Warehouse possesses competitive advantages and a narrow economic moat due to the firm's iconic brand, low cost position and unparalleled scale. Our fair value estimate of NZD 3.60 per share remains unchanged. The stock appears fairly valued at current levels.

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