Warehouse expects first-half earnings to fall by up to 28%

Warehouse Group expects first-half adjusted earnings from continuing operations to fall 22-to-28 percent as it keeps investing to transform the business.

The Auckland-based company said first-half adjusted net profit from continuing operations will probably be $32 million-to-$35 million, which "includes a significant accrual for a redesigned incentive programme, intended to reward better than expected financial performance along with reinforcing specific behaviours necessary to execute the transformation."

Excluding the accrual, chief executive Nick Grayston said the performance would be similar to the prior year when first-half adjusted earnings fell 13 percent to $39.7 million, falling within the guidance range of between $38.5 million and $41 million.

Under the leadership of Grayston, who took over from Mark Powell in December 2015, Warehouse has embarked on a three-year strategy to lift profitability by removing the complexity and cost of an inefficient operating model and reshaping the company's physical footprint to support the digital business.

That included the sale of its financial services firm to a subsidiary of SBS Bank for $18 million last July after an unsuccessful foray into consumer lending, booking $40.1 million of associated impairment charges through the 2017 financial year.

The retailer said Warehouse Stationery, or 'Blue Sheds', is preparing for the peak back-to-school season but expects first-half sales to fall some 6.5 percent based on softer performance of communications and technology segments, and the one-off impact of the integration of the Blue Sheds' business into the core Red Sheds operating systems at the start of the financial year. Noel Leeming continues to perform strongly and Torpedo7 retail has been steadily improving during the year

"While we are all keen to start delivering the benefits of our transformation, we have a long way to go, but these are encouraging signs. H1 trading to date has confirmed for us that our customers like and have responded well to our pricing and product changes. We continue to invest in technology and build out the team to execute the next steps in our change programmes," said Grayston.

Chair Joan Withers said many of the operation impacts on profit performance are "transitional in nature" and not expected to recur. However, "the Warehouse Group is in the process of a fundamental transformation to improve performance and profitability, which is our key focus for 2018," she said. Full year guidance will be given when it reports its first-half results on March 8.

Warehouse said the Christmas trading period demonstrated an "improving trend," despite the radical shift in the go-to-market strategy at its Red Sheds. Same-store sales fell 2.8 percent compared to the first quarter. Year-on-year unit sales showed an increase of 5.1 percent with transactions rising 2.9 percent in conjunction with strong sell-through of seasonal lines, it said.

The retailer said the change in its pricing strategy to "every day low price," coupled with a one-time reduction in ranges and consequent clearance activity has resulted in a reduced average selling price. "However, margin rates on current products have generally improved, and customers' reaction to the pricing changes and product improvements have been very positive," it said.

The stock recently traded at $2.11 and has dropped 24 percent over the past 12 months.

(BusinessDesk)