Warehouse 1H earnings fall, forecasts full-year to drop by about a quarter
By Tina Morrison
March 8 (BusinessDesk) - Warehouse Group confirmed that its first-half earnings fell, and warned its full-year result may drop by about a quarter as it transitions its iconic red shed discount stores to an 'everyday low prices' model and integrates its businesses.
Adjusted profit fell 16 percent to $37.7 million in the six months ended Jan. 28, which was ahead of the company's forecast range of $32 million to $35 million. The second-half performance was likely to be similar to the year-earlier, producing full-year adjusted earnings of $50 million to $53 million, a decline of about 25 percent from the year earlier, the Auckland-based company said in a statement. Its shares lifted 0.5 percent to $2.03 in early trading, having lost a fifth of their value over the past year.
Warehouse is moving its red shed business, which accounts for the bulk of earnings, to an 'everyday low prices' model, cutting down on sales marketing and stock clearance activity under the leadership of chief executive Nick Grayston, who took over from Mark Powell in December 2015. The transition is weighing on margins in the business, as sales revenue falls in line with a drop in the average selling price and costs increased due to increased logistics costs for higher unit volumes and employee costs. It's also making changes to integrate the operations of red sheds with its stationery unit, its sports goods business Torpedo7 and appliance retailer Noel Leeming, which was the only unit to grow earnings in the half.
"The business is executing on its change agenda and the board is encouraged by the first-half results, with the decline in financial performance from these changes to date being less severe than we have seen in other retailers who have shifted to an EDLP strategy," the company said. "Our financial results have been directly affected by these changes, however our second quarter results improved on our first quarter performance, and that trend is continuing into the second half."
Warehouse will pay a first-half dividend of 10 cents per share on April 12, unchanged from the year-earlier period.
The red sheds business posted an 18 percent drop in operating profit in the first half to $49 million, as sales fell 3.6 percent to $940.1 million. The company said the drop in sales was an anticipated effect from its transition to 'everyday low pricing', and said unit volume of product sold increased by 6.7 percent. During the period, the company relocated its Rolleston store to a new, larger site and opened a clearance site at Balmoral in Auckland, taking total store numbers to 93.
Warehouse said the transition to 'everyday low pricing' was largely complete and it was focusing on "price elasticity with a view to improving gross margins". It expects to complete the one-off clearance of discontinued products in the second half and the cost of doing business is expected to fall as it removes complexity from the business.
The company's Noel Leeming appliance retail business, its second-largest unit, boosted operating profit 66 percent to $15.3 million, as sales rose 7.5 percent to $453.9 million and it lifted operating margins to 3.4 percent from 2.2 percent. Profit was boosted by a one-time gain of $2.7 million related to store fixtures.
Noel Leeming opened two new stores in the period, in Royal Oak, Auckland, and Rolleston in Christchurch as well as relocated its Northwood, Christchurch site, and extended its Taupo store, taking total store numbers to 79.
Meanwhile, the company stationery stores posted a 43 percent drop in operating profit to $3.7 million as sales fell 7.1 percent to $129 million. Store numbers increased to 70 from 67 the year earlier after two new stores opened at the end of the 2017 financial year, and it opened a stationery store inside its Rolleston red shed store in the second quarter of this year.
"The operational integration of Warehouse Stationery (Blue sheds) into the Red Sheds caused a number of internal systems and process challenges, which when coupled with a softer trading performance in key categories, saw a sharp decline in performance for Blue," the company said. "The return to more normal performance levels is a key focus for what has been historically a very strong performer for the group."
Its Torpedo7 unit posted a 68 percent drop in operating profit to $800,000 even as sales increased 2.5 percent to $88.6 million as it cleared aged stock and changes in product mix impacted margins while efforts to increase brand awareness increased costs. It closed the Number 1 Fitness store at Penrose and relocated it to the existing Torpedo7 store at Mt Wellington, Auckland, reducing total store numbers to 11.
On a net profit basis, Warehouse Group first-half earnings increased to $31.8 million from $13.6 million a year earlier. The year-earlier period included a $28.1 million loss on the sale of its financial services business, compared with a $3.5 million loss from discontinued operations in the latest period.