Outdoor gear retailer Torpedo7 to open new stores despite falling operating margins

The Warehouse Group owns Torpedo7, Noel Leeming, The Warehouse and Warehouse Stationery. Photo / Supplied

Outdoor equipment retailer Torpedo7, once an online-only operation, is gearing up to open new stores despite shrinking operating margins.

The retailer - owned by The Warehouse Group, which also operates Noel Leeming, The Warehouse and Warehouse Stationery - had an operating margin of 0.9 per cent for the 26 weeks ended January 2018, according to its interim report. This was down from 2.8 per cent a year earlier.

Torpedo7 sales delivered revenue of $36.5 million in the third quarter, up 6 per cent on the previous period, with same-store sales growth up 4.4 per cent. However, its revenue growth has been decreasing over the past three years.

Craigs Investment Partners senior research analyst Mohandeep Singh said the retailer had continued to grow sales but its margins were falling.

"Margins have come down from 2.8 per cent to 0.9 per cent which is a quite a big swing," he said. "They've flagged that as product mix and clearance of aged inventory - that's something we've seen a couple of times now, which to me says they haven't quite got their sales cycles right."

Torpedo7 revenue was $157.7m for the year ended July 31, 2017, compared with $148.7m the year earlier.

"The 2017 full-year numbers were up 6 per cent which, on the face of it, is not a bad number but when you're still establishing a brand it's not a rock star number."

Its revenue grew by 6 per cent last year, 13.3 per cent in 2016 and 22 per cent in 2015.

"There's been a gradual slowdown in that growth rate which is natural when you're working off a bigger base but for what is an online business it really needs to be growing faster than what the general retail market is growing at," Singh said.

"The concern is that every year it's gradually getting a step down in the pace of growth and if you're having a step down in growth then earnings need to improve."

A spokeswoman for The Warehouse Group said Torpedo7's operating margins had been "slightly affected" as it executed its strategy.

"We are investing in the brand with a view to ensuring it is the leading authority in outdoor adventure in New Zealand," the spokeswoman said. "In addition to opening more physical stores we have updated our Albany store which has been very well received by customers.

"Torpedo7, under the leadership of the Noel Leeming/Torpedo7 management team has a clear strategy which will ensure brand clarity and a great product offering."

Hobson Wealth Partners' Mark Fowler said the retailer's recent financials were "disappointing" and its operating margin was not sustainable.

"The recent commercial performance has been disappointing when you consider Torpedo7 was acquired to supplement The Warehouse Group's online offering. Initial online sales growth targets were in the range of 25-50 per cent at the time of acquisition, but they have been considerably below this," Fowler said.

"Despite disappointing online sales numbers, one of the unintended consequences has been the encouraging performance of its 'bricks and mortar' sites.

"The renaissance in cycling has been a key driver of this and there is some thought about expansion of retail sites through the conversion of some of the underperforming Warehouse Stationary retail sites," he said.

"The bricks and mortar businesses were strong with same-store sales growth of more than 20 per cent. The cycle category remains a key growth area, and Torpedo7 does maintain a strong brand presence in terms of a domestic outdoor name."

Torpedo7 has 14 stores across New Zealand and is gearing up to open more in the next few months, including its largest to date in Westgate this week.