Blues hit Warehouse stationery stores

Back-to-school blues have hit The Warehouse's Blue Sheds with the unexpectedly weak performance of the discount chain's stationery arm hitting a sour note when it reported half-year results yesterday.

But earnings recovery at the company's troubled Australian operations provided a much-needed counterpoint, ensuring the group's $53.9 million after-tax profit stayed in line with market expectations despite being 2.8 per cent lower than last year's $55.5 million interim profit.

The Warehouse remains on track to hit an earlier profit forecast of between $66 million and $71 million for the full year, as long as the Australian recovery continues.

As the company signalled in January, a disappointing performance in seasonal goods such as apparel, sporting goods, toys and gardening products depressed trading profits for its flagship Red Sheds, which fell $12.6 million to $90.1 million for the six months to January.

But analysts had not expected such a weak performance from the Blue Sheds, which saw trading profits plummet 96 per cent to $157,000 from $3.8 million in the corresponding half year.

Sales dropped almost $5 million to $96.1 million.

Warehouse chief executive Ian Morrice said the shortfall was driven by the timing of back-to-school buying, which had shifted into the second half of the financial period.

But the chain was also stung by its single supplier of Hewlett Packard/Compaq computer goods, which failed to deliver the terms that allowed the heavy discounting of computers in the corresponding period.

"The promotion was not repeated because of a single-supplier relationship ... we will not make that mistake again," said Morrice.

The highlight of the result was the "very, very significant" improvement from the Yellow Sheds - the company's Australian discount chain. Customer spending improved, costs fell and margins improved as the results of a review of product ranges made itself felt.

That, in turn, drove trading profits for the division to $5.3 million from a loss of almost $13 million in the same period last year.

Morrice attached more flesh to the bones of strategies adopted since his arrival last year, such as offering more fashionable products to consumers, further developing house brands and testing new store layouts.

Customers are also likely to see lower prices as the company keeps a closer eye on competitors.

But he warned it would take at least three years to turn around the Red Sheds and stuck to predictions that the Yellow Sheds would not be profitable again until next year despite the positive signs.

The Warehouse will continue to wield its scale and has made good progress on an initiative to win discounts, improved service and quality from suppliers.

"Over 80 per cent of our suppliers are keen to engage in the programme," Morrice said. He confirmed the number of suppliers would likely be halved over the next few years, from 3000 now.

Emerging speculation that The Warehouse could be a potential buyer of Foodland's New Zealand chains Foodtown, Countdown and Woolworths drew a coy response.

The Warehouse has been positioning itself to gradually bring groceries into its Red Sheds but had "a range of options", said Morrice.