Aussie blues hit The Warehouse

By SIMON HENDERY retail writer

The Warehouse's four-year run of record profits could end this year with the company admitting its annual result will be dragged down by inventory problems at its Australian stores.

Shares in The Warehouse took a pounding yesterday after the company announced trading through its 118 Australian Clint's and Solly's discount stores had deteriorated over the past two months.

Chairman Keith Smith said the stores, in Queensland, Victoria and New South Wales, had been hit by Australia's weak retailing environment.

"There seems little prospect of an improvement in the general Australian economic environment in the near future," Mr Smith said.

The two chains' sales and gross margins were significantly below expectation because of "unsatisfactory inventory management and other integration issues."

The Australian operations were now not expected to make a positive contribution to the group's full-year earnings before interest and tax. The Warehouse had previously expected Clint's and Solly's to add $8 million to the company's earnings before interest and tax.

Managing director Greg Muir said a glut of some product lines was due to management's concentration on the wider issues surrounding last year's acquisition of the businesses.

"We probably didn't have the degree of focus on the detail of our buying programme that we should have," Mr Muir said.

"It's not that we think we've got anything particularly wrong over there, but a combination of small activities while we've been going through the integration has led to a state where the supply chain is starting to get clogged."

At the same time, The Warehouse has also been hit by a one-off additional cost of $2.2 million associated with its employee share scheme, due to an increase in the top personal tax rate from 33 to 39 per cent.

Mr Muir declined to reveal the company's predicted profit for the year to July 31, but said analyst forecasts of $70 million to $75 million were about 15 per cent too high. Last year's profit was $70.1 million.

The Warehouse is due to release its third-quarter sales figures next Friday.

Brett Wilkinson of broker DF Mainland said The Warehouse's difficulties echoed those felt recently by Australia's largest retailers.

"The statement has caught analysts by surprise and no doubt they will be focusing on the degree of damage caused by stock writedowns and slower than anticipated sales," he said.

"It could be another 18 months before The Warehouse's Australian operation produces an after-tax profit."

The shares closed down 46c, or 7.7 per cent, at $5.52 yesterday.