Warehouse revamp costs could squeeze profits

The Warehouse's pay rise comes into effect on August 1. Photo / Dean Purcell

Higher costs for the Warehouse prompted by its business revamp could squeeze its 2014 profits, says Morningstar analyst Nachi Moghe.

Moghe released a note on the retailer today describing its full year results announcement last Friday as "slightly disappointing."

Moghe said underlying net profits had been around 3 per cent below his forecasts. He also lowered his forecast for 2014 for the business.

"We are lowering our fiscal 2014 forecast to $80 million from $83 million as we see the company continuing to invest in its multi-channel business over the next two to three years, which will result in higher operating costs."

The Warehouse is expected to spend $430 million over the next five years increasing its footprint, modernising its stores and boosting its online presence.

Moghe said he expected modest same store sales growth and and slightly higher gross margins from better product sourcing in 2014.

He maintained his fair value estimate of $3.60 on this stock with a hold recommendation.

The Warehouse shares were trading at $3.73 at 12.30pm.