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UPDATE: Warehouse says profit growth will resume in 2015

UPDATE: Warehouse says profit growth will resume in 2015 following a decline in 2014

(Updates share price in fifth graph, adds broker comment starting in seventh graph and further detail on business divisions.)

By Tina Morrison

Sept. 12 (BusinessDesk) - Warehouse Group, New Zealand's largest listed retailer, expects earnings to rise this financial year following an 18 percent drop in 2014 as it benefits from investments in refurbishing its stores and adding new businesses.

The Auckland-based retailer said adjusted profit, which excludes one-time items and is the basis for dividend payments, fell to $60.7 million, or 18.6 cents a share, in the 52 weeks ended July 27, within its forecast range of $59 million to $62 million, and down from $73.7 million, or 23.7 cents, a year earlier. Net profit fell 46 percent to $77.8 million, it said.

Warehouse has increased spending on its 91 distinctive large format 'red shed' stores to drive future growth in the unit that accounts for about two thirds of its retail sales. To expand group earnings, the company aims to grow profit in the 'non-red' side of its business to be as large as the red sheds, adding technology and appliance retailer Noel Leeming, sports goods retailers R&R Sports and Torpedo7 and finance company Diners Club New Zealand. The company said today it has no major acquisitions planned for the current year, and earnings growth should resume.

"While our adjusted profit has reduced from the previous year, the company has been significantly reshaped and is well positioned for the future," chairman Ted van Arkel said. "The board understands that this now has to be leveraged into profit growth, and management is very focused on achieving this. The key elements of the group's strategic plan should ensure adjusted net profit after tax in FY15 is above that recorded in FY14."

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Warehouse shares were unchanged at $3.09, and have shed 17 percent this year. The stock is rated an average 'sell' based on seven analyst recommendations compiled by Reuters with a median target price of $3.20.

The company expects to provide more detail on its earnings expectations for the 2015 financial year with the release of its first-half earnings in March, which includes the key Christmas trading period.

"It was a year for the company to rebuild and position itself for future profit growth," said Grant Williamson, a director at Hamilton Hindin Greene. "Investors will be hoping to see the company achieve some good solid earnings growth in the current financial year."

Based on the latest result, the company's shares are trading at around 18 times earnings, showing investors anticipate future growth, Williamson said.

"The market will give The Warehouse time to show they can improve their earnings - if they don't manage to achieve it in the next six to 12 months then I think there will be disappointment and we could certainly see the premium in that share price get reduced," Williamson said.

In the 2014 year, Warehouse group sales rose 18 percent to $2.65 billion, while its costs increased 19 percent to $780.4 million, reflecting higher depreciation expenses associated with its store reinvestment and higher labour costs from the introduction of a 'career retail wage' programme for staff.

Operating profit at The Warehouse general merchandise stores fell 9.7 percent to $76.9 million as revenue rose 4.7 percent to $1.67 billion. The operating margin slipped to 4.6 percent from 5.4 percent the year earlier.

Some 14 of The Warehouse stores were refitted last financial year, bringing the total refitted in the last three years to 42, the company said. It said 58 of its stores are considered to be 'in line' with its brand, with the remaining 33 either scheduled for a refit over the next two years, earmarked for replacement by a new store or expected to require minimum investment.

The refurbished stores are outperforming, contributing to sales growth, Warehouse said. The store refit programme will return to a normal pattern in the coming financial years following a period of increased investment, it said.

The company's 63 Warehouse Stationery stores boosted earnings 14 percent to $11.8 million as revenue rose 8 percent to $250.6 million. The operating margin increased to 4.7 percent from 4.5 percent.

Its Noel Leeming unit increased earnings 2.7 percent to $11.3 million while revenue jumped 59 percent to $620.5 million. The operating margin slipped to 1.8 percent from 2.8 percent.

The Torpedo7 business increased earnings 65 percent to $1.1 million as revenue rose to $107.7 million from $24.2 million. The operating margin fell to 1 percent from 2.7 percent.

Warehouse will pay a final dividend of 6 cents a share on Dec. 11, taking the annual dividend to 19 cents, lower than the 21 cent dividend in 2013..


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