Warehouse changes dividend payout to help fund new financial services arm

Warehouse Group [NZX: WHS], the country's largest listed retailer, has changed its dividend policy to allow eventual profits from its new financial services group to be ploughed back into building up its lending book.

The dividend policy has been to pay out between 75 percent and 85 percent of adjusted net profit after tax and that's now been modified to apply only to the retail group, excluding financial services, shareholders were told at today's annual meeting in Auckland.

Chairman Ted van Arkel said the financial services arm is expected to post losses for the next two years as Warehouse builds up that business, and when it does begin generating profits, the company intends "reinvesting for a period to provide a capital base to fund growth".

The dividend payout for the 2015 financial year was 16 cents per share, which equates to 93.7 percent of adjusted net profit after tax. That's higher than the normal policy range because the company had promised shareholders when it raised $115 million for the financial services business in March last year that it would pay a 19 cents per share dividend for the next two years.

The board revised that back to 16 cents after a profit downgrade in early 2015, and now plans to pay out within the modified policy range in the 2016 year.

In response to a shareholder question, van Arkel said the board was considering introducing a dividend reinvestment plan next year. Chief financial officer Mark Yeoman said he had raised the idea with the board as the business will be requiring a lot more working capital in the future and a dividend reinvestment plan was "one of the tools we could use".

Given that Warehouse makes most of its profits in the second quarter and uncertainty around early losses from its financial services business, the board has said it will hold off providing earnings guidance for the 2016 financial year until the half-year result announcement in March 2016. Still, van Arkel said the board's view remains that adjusted net profit for the 2016 financial year will be broadly in line with the $57.1 million achieved in 2015, which was down on the $60.7 million posted in 2014.

While trading had been good in the first quarter, van Arkel said Warehouse continued to face strong competition, and when combined with foreign exchange headwinds, this would put pressure on prices and margins. He said the declining New Zealand dollar exchange rate was a reality facing all Kiwi importers and retailers and that coupled with low inflation and a slower domestic economy, means the ability to reflect changing costs in prices would be the key challenge this year.

The board and founder Stephen Tindall paid tribute to outgoing chief executive Mark Powell who was attending his last annual meeting after 13 years with the retailer, five in the top role. His successor is former Sears executive Nick Grayston who joins the group next month.

Powell reshaped the business during the past five years, diversifying its earnings from just the 'red' discount department stores and the 'blue' stationery stores to one including appliance retailer Noel Leeming, outdoor adventure business Torpedo 7, and the recent launch of its own financial services business offering credit cards and insurance tailored to its customers.

Tindall said before Powell started, the business was "experiencing sales decline and the stores had become pretty shabby because we hadn't reinvested in the business to the level we needed to."

"Mark has come in and turned things around with energy, enthusiasm and strong leadership and returned to the company ethos of the first 20 years where people feel valued to be team members," he said.

Powell said the company was well on the way to delivering Tindall's original vision of building a 100-year company that delivers long-term sustainable profit growth and helps New Zealand flourish.

"After a period of significant change, investment and reshaping, the medium-term focus is to deliver the current priorities, to leverage them, and drive a profit trend", he said.

Powell said the Warehouse's six key strategic priorities included keeping the core 'red shed' strong, growing 'non-red' to be as large as 'red', be the leading multichannel and digital retailer in New Zealand, source better products at better prices, be a leading New Zealand retail financial services company, and leverage the group competencies and scale.

Online sales rose to $149.2 million in the 2015 financial year, up from just $18.8 million in 2011.

It has more than 1 million unique visitors to its sites each month which is second only to auction house Trade Me in New Zealand, he said. The 'red' online business grew 32 percent year on year and digital marketing has moved from less than 5 percent of spend five years ago to nearly a quarter now.

(BusinessDesk)