The Warehouse is facing tough competition from online retailers like Temu.
Analysts expect The Warehouse to forgo paying a final dividend to its shareholders in the second half of its financial year after the retailer put out a profit downgrade earlier this week.
The retail group now expects 2024 sales from continuing operations to be between 6-7% lower than the prior year with earnings before interest and tax – excluding the loss from discontinued operations and any potential restructuring costs – to be in a range of $22 million to $30m, compared with $83.4m last year.
Forsyth Barr analysts Rohan Koreman-Smith and Paul Laxton Koraua said the guidance implied the company would make an operating loss of around $17m in its second half.
“We adjust our earnings assumptions to reflect the weaker sales run-rates in 2H24.
“We expect WHS will not pay a final dividend in FY24.”
On top of that they don’t think things will improve much for the retailer any time soon.
“We largely expect sales to be broadly flat in FY25 versus FY24, as we expect the NZ consumer backdrop to remain challenging into 1H25, with only modest growth returning in 2H25.
“We expect margins will come under some pressure this year given the competition for the shrinking customer wallets. We also marginally reduce our cost assumptions, given WHS’s current focus on cost control and optimising its core brands.”
The pair have dropped their target price for the stock from $1.45 to $1.10 although that is still above its current trading price of 98c.
Jarden analysts Guy Hooper and Nick Yeo also dropped their target price on The Warehouse from $1.30 to $1.15 after the update and expressed concern about the retailer losing market share on top of the weak consumer demand.
“While consumer activity has been limited, we assume WHS continues to lose market share, particularly to low value offshore online retailers.”
There are signs that online retailer Temu is eating The Warehouse’s lunch. Latest GDP figures show consumer imports of low-value goods have skyrocketed in recent times, up 50% in the last year and up 20% in the March quarter alone.
Hooper and Yeo say there is a lot of work needed to turn around the business.
“WHS remains our least preferred exposure within the New Zealand retail sector, given its poor track record, the increasingly competitive market and higher earnings risk given the operating and financial leverage that exists within the business.
“WHS is in the process of addressing its business operations, with a leadership refresh and new CEO search under way. While we do see value in the individual businesses and consider the recent decisions to move on from Torpedo7 and TheMarket.com to mark a positive change in the approach to capital allocation, we believe there is a lot of work to be done to turn around operations that have been tracking backwards for a number of years.”
The Warehouse is not the only one feeling the squeeze from lower consumer spending. KMD Group which owns Kathmandu also put out a profit warning late last week.
The company said its group sales were down 8.4% for the first four months of the second half of its financial year and said its sales fell even faster in the first three weeks of June.
Robbie Urquhart, senior portfolio manager, Australian equities at Fisher Funds said it had been a poor start to winter for Kathmandu, which was a key selling period for the outdoor clothing retailer.
“It’s down in the first four months but getting worse from a New Zealand perspective with the first three weeks in June down 11.5% year on year.”
Urquhart said the weak sales trend had brought the company’s balance sheet into focus for the market because Kathmandu was carrying a bit of debt, although Kathmandu had pre-emptively taken action with the support of its banking group to provide itself with some covenant relief.
“It’s a sign we are in an environment where the economy is slowing, the consumer is slowing and so the strength of retailers’ balance sheets is going to be a key focus for some time to come.”
Urquhart said at this stage it didn’t look like the company would need to do a capital raise because of the extra headroom from a banking covenant relief perspective.
“But it is going to be something if these negative trends continue that may come into sharper focus as we roll through the rest of the calendar year. They are not completely out of the woods.”
He said retailers were focused on cash and inventory management.
Australian analysts have also been looking to New Zealand, concerned the weak signs here could also arise in Australia.
Urquhart said although the Australian consumer was holding up better, there were some indications that weakness was starting to creep into consumer spending and habits as well.
That begged the question of whether profit warnings seen in New Zealand were a canary in the coal mine for what could be yet to come in Australia.
“This wouldn’t be a surprise for us given the culprit for the weak consumer in New Zealand is ostensibly around high interest rates with our rate at 5.5 % and cost-of-living pressures that transcend borders.”
Kiwis will get tax cuts at the end of July, while those in the Auckland region will also benefit from the regional fuel tax removal.
Urquhart said these would make some difference.
“But until we see interest rates coming down and consumer confidence being lifted sustainably, I don’t think we are going to see a big change in those consumer spending patterns.”
One area where consumers are spending more is supermarket food. ASX-listed Woolworths and Foodstuffs will benefit from this. Urquhart said the likes of Pak’nSave would likely be performing well.
He said it was tough times, but central banks had been lifting interest rates for this reason to crimp consumer demand which ultimately would have a negative impact on inflation.
“To the extent that we see retailers discounting prices while negative for retailers themselves, that does help dampen and reduce inflationary pressures, which both the RBA and RBNZ would be pleased to see.”
But Urquhart said central banks would likely hold off on rate cuts until more pain was seen.
“I do think we will see things get worse before they get better. But equally, the solution to inflation is lower prices and less spending and so this is a darkest before the dawn moment we are in – maybe not the darkest patch, we are getting closer to the end of the cycle than we have been.
“It won’t go on indefinitely, which is the silver lining, but the central banks will hold on until they feel that has really put a lid on some of these inflationary pressures, because inflation has remained somewhat sticky.”
More evidence of a struggling domestic construction sector has come to light from Australia’s GWA, which said its New Zealand business will be “right-sized” due to conditions here.
GWA – which took over New Zealand’s Methven in 2018 – said its Australian business was gaining traction and its UK business had reported volume growth, despite a general contraction in that market.
But ASX-listed GWA – a leading supplier of building fixtures and fittings – said revenue from its New Zealand business had been impacted by continued deterioration in housing and construction markets and an economic recession.
In response, GWA was considering simplification of its New Zealand operations.
”With the deteriorating market in New Zealand, GWA is considering right-sizing the local business to align to the current market conditions,” GWA said.
GWA will continue to maintain its Auckland-based innovation and research and development centre.
Management would now start a consultation process with New Zealand employees. GWA operates through its Bathrooms & Kitchens business.
The group has the Caroma, Methven, Dorf and Clark brands.
- additional reporting Jamie Gray
Auditors PwC: Cited disruptions to operations from that IT upgrade.