The 73.9 per cent slide in The Warehouse Group result was mainly due to its ill-considered move into financial services, causing a one-off hit to its bottom-line of $40.1m.

Financial services was estimated to have been costing the giant kiwi retailer around $10 million a year and the sale this month was described in an NZX presentation as "removing a drag on group earnings".

Chief executive Nick Grayston explained to investors why financial services was quit, resulting in the biggest single one-off loss in net after tax profit drop from $82.4m last year to $20.7m for the July 30, 2017 year.

"The decision was taken to exit financial services, freeing up capital and management time. It de-risks capital demand with a consequent reduction in gearing and was completed on September 9," Grayston told the investor conference call.

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The company, known for its flagship red shed discount department stores, sold financial services to a subsidiary of SBS Bank, Finance Now, for $18 million resulting in an impairment on software of $17m.

Grayston said The Warehouse was now building its partnership with Finance Now.
Without that toxic item in the accounts, things might have looked much better: when the result was adjusted for financial services' sale, net profit after tax was a far healthier $68.2m, down only 1.4 per cent on last year's $69.2m, the company said.

Hamilton Hindin Greene investment adviser Jeremy Sullivan said two months ago that although the finance business had been viewed as a strong move by ex-chief executive Mark Powell, Grayston might not have agreed because the division was not performing as well as hoped.

Castle Point Funds Management's Stephen Bennie has estimated financial services' losses at "essentially $10m a year as of the interim result. In addition to that they had to writedown the value of the division by $40m in the last few months. Basically it had become an untenable mess."

Grayston and chairwoman Joan Withers could now focus solely on rejuvenating the business model and integrating their big four retail chains, he said.

The Warehouse held big hopes for its money arm as part of an existing joint venture with Westpac, saying on its TWGFS web site: "The Warehouse Group Financial Services is committed to being a leading retail finance company in New Zealand. In November 2015, we launched Warehouse Money with innovative credit cards and insurance products to help New Zealand families get more out of every day from a trusted and loved Kiwi brand."

But in its result, the business said: "The financial services business reported an adjusted net loss after tax of $8.9m for FY17, increased from $5.0m in FY16. Performance in the year was impacted by slower card growth and the level of bad debt in the receivables
book."

Grayston told the Herald The Warehouse would continue to have sales throughout its network but was moving to an "every day low price" model where all items were top value.

"We're going to give incredible value every day instead of having those for sales periods. Our customers have told us The Warehouse is where everyone gets a bargain and they would like that every day. We will not be moving prices up and down in the same way," Grayston said.

"High-low pricing drives a lot of extra costs to mark prices up and down, marketing to tell people you are having sales and you're then rotating a whole bunch of products. What we have heard from our customers is uncertainty at whether the price is the best price or whether they were to come in tomorrow it might be a lower price."

In the 2017 year, Grayston said 143 staff were made redundant, predominantly in the Auckland head office "but we had signalled around 130".

The July 2018 year would not see many new-store openings. That would be "a minimal, not a big part of the strategy."

Changes in the 2016/17 year were new The Warehouse, Noel Leeming and Warehouse Stationery stores at Tauranga Crossing, a new Warehouse Stationery in Hawera, new Noel Leeming at Takapuna, new Warehouse Stationery at Johnsonville, moving The Warehouse from the Remarkables Park at Queenstown to Five Mile and opening a new Torpedo 7 clearance outlet in Newmarket.

The Warehouse Group has 252 stores employing 12,000 people which Grayston said made it one of New Zealand's top five employers.

Chris Wilkinson of First Retail Group said the big profit slide showed the group was "right-sizing its business rapidly in the face of impending change and consumer behaviour which is very logical".

"They needed to make very cathartic decisions around the business. That was necessary. The speed of it was necessary. That's reflected in the final number."

The Warehouse Group
Years to July 30
2017 2016
Revenue $2.98b $2.92b
Operating profit $107.8m $111.1m
Net profit after tax $20.4m $82.4m
Annual dividend 16cps 16cps