Retailers may face tough Xmas after Warehouse downgrade

Shoppers at The Warehouse. Photo / File

Retailers may be facing a challenging Christmas after The Warehouse - a key barometer for the sector - revealed that the last few weeks of trading were well below last year.

The retail giant, in a statement to the NZX, said its performance in the lead up to Christmas had been below expectations and while the next few weeks were an important trading period, it was unlikely that the year to date shortfall would be fully offset.

It said net profit for the first half to January 29 was expected to be $38.5 million to $41m - representing a 10 to 15 per cent fall from the same period last year.

The announcement drove the company's share price down by 30c or 9.6 per cent to $2.82.

Warehouse will release its complete first-half earnings on March 9, 2017, and provide an update on its strategy and plans to reduce costs, it said.

More than half of the retailer's sales are generated by its general merchandise "red shed" Warehouse stores and the second quarter of its financial year includes the peak Christmas period and generates most of the group's sales and profit in its first half.

The company warned at its annual meeting last month that it would likely write down the value of its financial services business due to weaker-than-expected trading.

"While sales growth has continued at The Warehouse, margin pressure in the face of an increasingly competitive retail environment, combined with a below expectation performance from Financial Services, as previously indicated at the group's annual meeting, are the two main contributors to the lower profit expectations," Warehouse said.

Mark Lister, head of private wealth research at Craigs Investment Partners, said the company' update highlighted the difficulties facing retail - margin pressure.

"The Warehouse is one a barometer of how the retail space is tracking," Lister said.

The entire sector faced margin pressure in the form of increased competition, especially from online platforms, and Lister said smaller, nimbler retailers could hold up better.
Official data showed the GDP and the retail trade sector were growing at a reasonable pace, but the data did not tell the whole story.

"Retail sales don't tell you anything about margins," Lister said. "On the hospitality side, retailers looked to be doing well, but apparel and merchandise are under pressure.

Christchurch-based retailer Smiths City said the upcoming festive season was shaping up to be a challenging one.

"I am sure that looking forward, we can expect a challenging Christmas and remainder of our financial year as I believe the retail market will soften slightly in 2017," chief executive Roy Campbell said in a comment alongside its first-half result.

Analysts said retail faced potential headwinds in the form of a weakness in the New Zealand dollar. Likewise, rising oil prices and the higher interest rate would put pressure on household's disposable incomes.

Paul Harrison, portfolio manager at Salt Funds Management, said he was surprised by the size of The Warehouse's earnings downgrade.

"They are facing all sorts of competitive threats from new entrants and also online," Harrison said.

In its latest monthly update on online retail sales, Bank of New Zealand said online retail sales at local sites were up 11 per cent in October versus the same month a year earlier but were up 17 per cent at offshore sites in the same period.

Harrison said the time may have come for the Warehouse to "resize the business" into something more appropriate as the "days of massive red sheds the length and breadth of New Zealand" has likely passed.

(additional reporting BusinessDesk)