Warehouse fights back as competitors eat into earnings

Mark Powell. Photo / Richard Robinson.

The Warehouse, under attack from the so called "category killers", reported a slight increase in its first-half profit yesterday, but analysts say it will take time for the company to reassert itself as New Zealand's pre-eminent discount retail chain.

Adjusted net profit rose to $54 million in the six months to January 29, up from $52.3 million a year earlier, while sales rose by 3.3 per cent to $937.9 million. The profit included about $7.4 million from the release of warranty provisions on the Warehouse Australia business it sold in 2005 that expired in December. Excluding the gain and other one-time items, unadjusted profit fell to $46.7 million from $53 million.

The company cut its first-half dividend to 13.5c from 15.5c a year earlier.

Forsyth Barr analyst Guy Hallwright said the result was better than expected, although market expectations had been "conditioned" by the earnings downgrades the company had put out in the past few months.

But he said sales growth in the last two quarters was a positive development.

In September, The Warehouse announced a plan to spend $430 million improving existing stores and on new sites over the next five years.

Chief executive Mark Powell, who took over from Ian Morrice last year, said revitalising The Warehouse was a work in progress.

The company had become too focused on the short term and did not invest enough in the business.

"This strategy is aimed at rectifying that," he said.

"These have been the first steps but they have been encouraging first steps."

Powell pointed to the 2.7 per cent increase in same-store sales over the half-year as "an important reversal of a key metric".

While the retailer managed to lift sales, it did so at the expense of margins.

In its Red Sheds, the operating margin fell to 7.4 per cent from 9.2 per cent and at its stationery outlets it shrank to 3.1 per cent from 3.7 per cent.

The company kept its guidance for the full year for an adjusted net profit of $62 million to $66 million, down from $76 million in 2011 and a profit of $80 million.

"Trading conditions are expected to remain uncertain in the remainder of the financial year," it said.

Analysts said the proliferation of the so-called category killers - such as Bunnings in the hardware sector - had eaten into the company's earnings over the years.

The challenge for The Warehouse would be whether its extensive capital expenditure programme would be enough to turn the tide.

Matt Goodson, portfolio manager at BT Funds Management, said the programme could succeed "or they could end up with a very large interest bill at the end of it".

He said institutional investors had grown sceptical about the company's performance over recent years, and the stock is a far cry from its 2007 value of well over $6 a share.

Shane Solly, portfolio manager at Mint Asset Management, said The Warehouse was spending money to maintain its relevance.

"Does the Warehouse have its mojo back? They are still implementing their strategy so you can't give an unequivocal 'yes' tothat."

Shares in The Warehouse closed at $2.80, up 15c or 5.6 per cent from Thursday.