Investment in The Warehouse Group appears to be paying off as profit surges, and shareholders will now be watching closely as the country's largest retailer embarks on a strategy to cut complexity and cost.
The Warehouse posted net profit of $78.3 million for the year ended July 31, up 49 per cent on the previous year, but analysts say it will be the next period that will be telling for the business.
James Grigor from Macquarie Private Wealth said that while the result was at the top end of guidance, this was in comparison with a poor first half the year before, meaning the comparative period was much higher in 2016.
The board has approved new chief executive Nick Grayston's three-year strategy, focused on lifting profitability by removing "complexity and cost" from an inefficient operating model and reshaping the company's physical footprint to support the digital business.
"The real news in the result was the CEO strategy from Nick," Grigor said.
"In our view, this is the third iteration in a decade of a change in strategy and what it's doing is not really building on leveraging the work done previously - so they're focusing a lot on things like data collection and online," he said.
"That absolutely has to be done and it's good they've identified that and are working towards it, but one would expect as an investor or analyst that that work has already been done and so there's some concern they are going back to Retailing 101 and going backwards to go forwards."
Grigor said the result was very positive but the focus would be on the forthcoming strategy.
Over the past few years under the leadership of former chief executive Mark Powell, The Warehouse has spent hundreds of millions of dollars renovating its red sheds and buying new businesses to help drive growth.
Forsyth Barr analyst Chelsea Leadbetter said that while this was good and was starting to pay off, it was still early days.
"They're delivering some profit growth, which obviously investors like to see, but there's going to be real focus now on their strategy and around optimisation of what's been done already," Leadbetter said.
"I think we're still in pretty early days - you really want to see sustainable profit growth and what does the next 12 months look like. No guidance has been given and no financial targets have been provided so it's very difficult to know what to expect at this stage."
Grayston, who has been in the role for nine months, said he was happy with the continued good progress but the job was not done by any means.
Revenue increased 5.6 per cent to $2.92 billion, with sales growth across all of the retailer's brands.
Gross margins shrank thanks to its Noel Leeming group lifting sales of low-margin consumer electronic goods, however overall operating margins widened to 3.8 per cent from 3.4 per cent as The Warehouse focused on stripping out costs.
"We had some tough years and under-investment but in credit to Mark, I think he left a very well-organised business with strong process and a pretty strong team in place," Grayston said.
"So we have a lot of opportunity to build on those foundations and one of the key messages is around simplification.
"The previous business model drove a lot of complexity, particularly around promotional cadence, and with complexity comes cost so we're really looking to take out complexity to take out cost."
The company's shares closed up 4c yesterday at $2.94.
The company's flagship red sheds stores lifted sales 2.5 per cent to $1.76b for a 12 per cent increase in operating profit to $79.6m, and the blue shed stationery chain increased sales 6.2 per cent to $279.2m, with profit up 12 per cent to $14.3m as better sourcing helped widen margins for both units.
Noel Leeming profit jumped 88 per cent to $12.1m on a 13 per cent increase in sales to $752.1m, grabbing market share with the collapse of consumer electronics chain Dick Smith.
Torpedo7 boosted sales 13 per cent to $148.7m for a profit of $3.4m, building on the break-even result it had achieved a year earlier.
The financial services arm Warehouse Money, launched last year, reported an operating loss of $3.4m, which Warehouse said was in line with expectations.