Red Sheds stronger after Australian sale

Ian Morrice said the Sylvia Park outlet was in its early stages but performing according to expectations. Picture / Bay of Plenty Times

Investors chose to take a negative view of Warehouse Group chief executive Ian Morrice and warnings about a flat year ahead in the company annual results released yesterday.

Economists have been saying the same for months.

But the comments in an otherwise positive annual result - dividends increased 1.5c to 5.5c - burst the bubble for the stock price of the Red Sheds.

On Thursday, the stock price had reached $5.15, up 62c from $4.55 on August 10.

But after the result, The Warehouse dropped 20c to $4.95 before recovering slightly to close 17c down at $5.

Morrice described trading conditions as "challenging ... [with] consumer demand weakening, reflecting the impact of petrol price increases, a reduction in house equity withdrawal, higher mortgage rates and a softening housing market".

He expected real sales growth over the next 12 months to be flat but said it was "too early to provide specific guidance for 2007".

There were "cost pressures across the business, especially in raw materials currency, compliance, labour and freight costs".

Guy Hallwright, of stockbrokers Forsyth Barr, said the dour forecast was not surprising. The Warehouse had had relatively flat sales for a few years.

The fall in the share price was more likely due to talk of rising costs than a reference to flat sales.

Other stocks that talked about rising costs in their annual results had also suffered falls, he said. It was not something investors wanted to hear.

Elsewhere, results reflected a solid trading performance, compensating for the extraordinary costs of closing down operations in Australia.

Overall sales from continuing operations was up 2.2 per cent to $1.72 billion. Net profit after tax, excluding the Warehouse Australia disposal, was $96.9 million, which Morrice said was a record.

Net profit was $29.6 million, down from $39.2 million last year.

Analysts have said the results put a cap on losses from the Australian operation that cost $88.8 million before tax.

But Morrice said he would be happier next year when the Australian losses were no longer being written about. Leaving Australia "was right decision for the business".

"We've come out with a good result for the exit from Australia and you can see the benefits flow through into the dividend and adjusted earnings that are significantly higher than the group has done before."

Maurice also announced an increase in capital expenditure - from $60.5 million this year to $90.8 million next.

Partly the increase reflected a "catch-up" after an 18-month period when The Warehouse Group had held off significant spending while it considered options.

Forsyth Barr's Hallwright said the capital expenditure was substantially below what it had been a few years ago.

"If you go back a few years it was up around $130 million. Some of their capex is for the refit of stores, but there is some that relates to the supply chain."

Morrice said key aspects of growth were in developing the Warehouse Extra format and introducing groceries at selected stores and also offerings such as pharmaceuticals and liquor. The rollout would take four or five years.

"For the past last 18 months to two years, we have paused capital growth," said Morrice.

"There is still [an] opportunity to improve existing stores.

"There are still one or two opportunities with new developments for entirely new space like [Auckland retail development] Sylvia Park."

He said Sylvia Park was in its early stages but was performing according to expectations.

The Warehouse

Year to July 30 20062005

Total revenue $2b$2.2b

Net profit $29.6m$39.2mFinal dividend 5.5 cps