Aussie write-off hits Warehouse

Australia's Yellow Sheds made an impact on The Warehouse's full-year result yesterday - but not in the way investors had hoped.

Warehouse chief executive Ian Morrice had no fresh information to offer about a review many anticipate could lead to a sale of the underperforming Australian operations.

But a $33 million write-off in the value of the Australian business led to a 36 per cent drop in the group's full year net profit to $39 million.

Analysts paid little attention to the accounting adjustment. Excluding such one-off items, a 17.5 per cent increase in operating profit to $71.9 million put the underlying result at the top end of expectations, despite a 1.5 per cent drop in revenue to $2.2 billion.

Their focus was firmly on the performance of the core Red Sheds - and whether efforts by Morrice to stem a slide in operating profit margins had paid off.

Most concluded it was too early to tell whether his strategies would work, but there were positive signs.

"It was a good result - the second half performance showed some real signs of improvement to the business model," Macquarie Equities analyst Warren Doak said.

Results from the Red Sheds showed the effects of rising fuel costs on consumer spending, higher costs and the company's move away from short-term discounting. Trading profit fell 8.4 per cent to $138.6 million. Sales were up 0.4 per cent to $1.4 billion, but same store sales fell 2.5 per cent.

Morrice said the company was just six months into a three-year turnaround project which would see The Warehouse move up the value chain in the style and quality of goods it offered - while staying true to its heritage of bargains, with a "price rollback" campaign promising marked goods were cheaper than those offered by competitors.

Already the company has become more fashion conscious in its apparel selection. "Sales on new season product are going extremely well," said Morrice.

The Warehouse has introduced brand names such as Slazenger, Head and Dunlop to its sports range and secured an exclusive TV and audio deal with Sanyo.

It is also trialling new store layouts, signs and shelving, among other things at a "laboratory store" in Te Rapa, which is performing ahead of expectations. "Expect a gradual improvement - I don't expect to wake up one day and find we've come to the end of the road," said Morrice.

But he said the latest result already contained signs of improvement. Operating margins at the Red Sheds stabilised in the second half after falling in the first, while group operating cash flow was up 73.3 per cent.

The Warehouse Australia's results were better than most analysts had anticipated, with positive cash flows of A$8 million and a trading loss reduced to A$5.4 million, from A$32.2 million.

But Morrice was not forthcoming on plans for the unit. The company has said it is reviewing the unit and is in talks with a number of parties, including Australian discount retailer Millers Retail.

Morrice said discussions were continuing - and until the market was told otherwise it was "business as usual", with the operation on track for breakeven next year.

The Blue Sheds - the company's stationery business - reported a 45 per cent fall in trading profit to $3.9 million in a tough competitive environment.

Morrice said the focus for the next 18 months would be on better use of the store "footprint".

He was confident the company could face up to a tougher market.

"At the end of the day, the moves we are making are to position ourselves incredibly well for any marketplace," he said.