Warehouse says FY earnings to fall as it seeks $115m to expand financial services

Warehouse Group [NZX: WHS] expects full-year earnings to fall as it invests in financial services and buys rival retailers to diversify away from its core 'red shed' discount stores.

Warehouse expects adjusted full-year profit of $67 million to $71 million, down from $73.7 million last year, the Auckland-based company said today. It posted a 13 percent drop in adjusted first half profit of $46.2 million today, at the bottom end of its $46 million to $48 million forecast.

New Zealand's largest listed retailer said today it plans to pay $3 million for the Diners Club New Zealand business to beef up its financial services offering, as part of a plan to get half its earnings from areas other than its core 'Red Sheds'. To reach the target, it is expanding its stationery stores, bought the Noel Leeming entertainment and technology chain and a stake in online outdoor and adventure retailer Torpedo7 Group and is buying school uniform business School Tex.

"We are in an ongoing process of reshaping The Warehouse Group, with each business at a different stage in its journey," chairman Ted van Arkel said. "Opportunities such as financial services, which has arisen because of our strategy, are exciting and will provide material earnings to the group in the medium term."

In order to invest in its business to drive future earnings, the company will cut its dividend payout ratio to between 75-85 percent of adjusted profit, from a previous policy of 90 percent of adjusted profit, it said. To provide certainty for shareholder, the policy will be phased in over the next two years when a minimum dividend of 19 cents per share will be paid.

Shares in Warehouse last traded at $3.61 and are in a trading halt as the company seeks to raise $115 million to strengthen its capital base to support its financial services strategy. It plans to sell $100 million of shares at $3.23 apiece to institutional shareholders today. It also plans to sell $15 million of shares to New Zealand resident shareholders.

Warehouse founder Stephen Tindall and his Tindall Foundation, which together own about half the shares in the company, will participate in the equity raising to maintain their existing stakes.

The company expects its financial services business to lose as much as $3 million after tax in the 2014 and 2015 financial years as the business is developed, and contribute to earnings from the 2016 financial year.

Warehouse is following retailers including Target Corp and Tesco as it aims to boost earnings from selling financial services and help the estimated 1.5 million people who come through its doors every year buy more products.

It expects to have $600 million of receivables by the 2020 financial year. The company currently generates about $400 million of receivables for third parties and its joint venture.

Warehouse's core red shed discount stores, which make up more than two thirds of its sales, boosted first-half revenue 6.2 percent to $920.1 million. The unit's same-store sales rose 4.1 percent and marked 12 consecutive quarters of positive same-store sales growth.

Chief executive Mark Powell said he expects the red sheds to continue to produce a 3 to 4 percent growth rate in same store sales over the medium term.

(BusinessDesk)