The board of The Warehouse Group has told shareholders that an impairment of goodwill in its financial services business is "highly likely" after a weaker-than-expected first quarter trading in the new division.
Chair Joan Withers, who stood for re-election at the annual meeting in Auckland today after being appointed in September, said the board was in the process of reviewing the outlook for financial services and an adjustment to its expected breakeven in 2018 was likely along with the impairment.
Withers said it was too early to say the board should be re-thinking its strategy on entering that business.
"We embarked on the financial services journey because we saw great opportunities. It's still in the early stages and there's been no decision that we're not on the right course," she said.
Chief executive Nick Grayston said the focus for financial services was to start leveraging the scale of the group's retail businesses and continue to drive growth to achieve scale.
He said the below-expectation performance from financial services in the first quarter resulted from lower active accounts from the lending book it bought from Westpac, which increased the risk of a non-cash goodwill impairment for the first half of the 2017 financial year.
Warehouse Money was launched a year ago offering credit cards, insurance products and a pre-paid mobile brand. The stated aim was to grow its lending book to $600 million within five years at which point the financial services arm would add $30m to earnings before interest and tax. The financial services arm made $20.3m in revenue in the 2016 full-year and an operating loss of $3.3m.
Last year the board changed the dividend policy to allow any profits from the financial services group to be ploughed back into building up its lending book. The dividend policy now pays out between 75 to 85 per cent of adjusted net profit after tax of the retail group only.
One shareholder questioned whether dividends were too low, given the retail group was performing more strongly. The dividend for this financial year is 16 cents per share, which equated to 80.2 per cent of adjusted net profit after tax of the retail group.
We embarked on the financial services journey because we saw great opportunities. It's still in the early stages and there's been no decision that we're not on the right course.
While the amount was the same as last year, that payout equated to 93.7 per cent of the adjusted NPAT and was higher than normal because the company had promised shareholders when it raised $115 million for the financial services business in March 2014 that it would pay a 19 cents per share dividend for the next two years. That had to be revised back to 16c after a profit downgrade early last year.
Withers told shareholders the board had to "balance the appropriate investment in the business with delivering an appropriate return to shareholders."
Like most retailers, the second quarter's Christmas trading is a major influence on earnings, Grayston said. With the expected losses from the financial services business as well, the company won't provide earnings guidance for the current financial year until the release of its half-year results next March.
The next phase of the strategy is to continue to translate those trading performances into sustainable profit growth, and deliver returns on the diversification investments.
Grayston, appointed last year, outlined his new strategy to build on the turnaround in trading performance and a period of investment catch-up necessary after a period of under-investment and sales decline in the late 2000s.
"The next phase of the strategy is to continue to translate those trading performances into sustainable profit growth, and deliver returns on the diversification investments," he said. "We've been making good progress but will need some additional capabilities to reposition the business for the next phase of our strategy and to invest in our digital future."
The strategy includes transitioning the Red business from a high-low pricing model to a more Everyday Low Price model with improved range, reinventing customers' concept of a bargain, maintaining leadership in the back-to-school market with the Blue business, building profitability in Noel Leeming through excellent customer service, and focusing on margin expansion in the Torpedo7 group through category management and better sourcing.
Withers said the group had sufficient cash available from its operating businesses to fund the required investment in the new strategy.
The Warehouse shares are currently trading at $2.88.