Warehouse first-half profit drops on financial services impairment

The Warehouse Group reported a 76% drop in first-half profit after the retailer took an impairment charge against its financial services unit, recognised restructuring costs and earned less from its red shed stores.

Profit fell to $13.6 million in the 26 weeks ended January 29, from $57.2 million a year earlier.

The result included a $22.7 million impairment against the Financial Service Group and restructuring costs of about $4 million. Adjusted profit fell about 13% to $39.7 million, within the guidance range of $38.5-41 million it gave in December.

The Warehouse warned in December that it was facing a weaker than expected run-up to Christmas, its peak trading season, and that was confirmed as the company says it endured a "subdued peak seasonal trading period and intense competition driving margin pressure.”

Weak trading at its core red sheds was compounded by wider losses for financial services, which it acquired 100% ownership of the previous year by buying out joint venture partner Westpac Banking Corp only to face a weaker than expected transition and below-target card spending.

Last month The Warehouse announced a net 130 job cuts as part of moves to eliminate duplication in support functions between its retail operations, with savings from restructuring expected to show up in 2018.

Chief executive Nick Grayston says weak trading has continued into the second half of the year and as a result, full-year adjusted profit was forecast to be $54-58 million, a drop of as much as 15% from a year earlier.

"The mixed first half-performance emphasises the need for the business to accelerate change, and execute on the retailing fundamentals with precision to restore sustainable profitable growth," Mr Grayston says.

"The new operating model will drive greater operational synergies, particularly in the red and blue sheds, increase our focus on e-commerce and digital capabilities, and allow the group to play a stronger and more objective role in guiding the performance of the portfolio," he says.

The company will pay a 10c first-half dividend and is projecting a 5c payment for the second half.

Financial services recorded a first-half operating loss of $5.2 million, up from a loss of $2.7 million a year earlier. The unit's sales in the first half rose to $10.3 million from $8.1 million.

"The trading performance from the Financial Services Group during the half year continued to be below expectations, caused largely by a fewer than expected number of the cardholders acquired as part of the Westpac acquisition taking up new card offers," the company says.

"This resulted in the board reviewing the outlook for the Financial Services Group and looking at various alternative strategies to gain the scale necessary for the business to achieve profitability."

The retailer's red shed stores reported a gain in first-half sales to $975 million from $973 million while operating profit dropped to $59.5 million from $65 million. Same-store sales rose 1.3%.

Warehouse Stationery sales rose to $139 million from $137.8 million while operating profit rose to $6.5 million from $6 million.

Noel Leeming was a bright spot, with sales climbing to $422 million from about $380 million and operating profit rose to $9.2 million from $6.4 million.

Torpedo7 sales rose to $86.4 million from $76 million and an operating profit of $2.4 million, up from $1.7 million.

The shares last traded at $2.57 and have fallen 7.2% in the past 12 months while the NZX 50 Index gained 11%.

(BusinessDesk)