Underlying performance lifts Red Shed

The Warehouse's unsuccessful Australian foray continued to depress its earnings in the first half, forcing the country's largest retailer to take an $8 million net loss yesterday.

Without the $88.8 million pretax charge for the Australian writedown, the Warehouse's after-tax profit increased about 11 per cent to $59.9 million on the earlier period.

The Warehouse shares were up 2c to close at $3.72 yesterday with analysts calling the company's underlying performance solid.

Chief executive Ian Morrice said leaving "patchy" consumer spending trends aside, he was confident the retailer was on track to meet its full-year earnings forecast of between $83 million and $88 million, excluding the Australian writedown.

In the period to January 29, total New Zealand "Red Shed" sales - which now make up 97 per cent of revenue - improved by 1.5 per cent to $831 million on last year. Same-store sales were down 1.3 per cent.

The department store chain's profit margins were up a slight 0.1 percentage points to 11.1 per cent, marking the first improvement in three years.

Morrice said arresting declining margins in the New Zealand businesses - the department store and stationery chain - had been his main focus.

The company had just completed the first year of Morrice's three-year plan, which began with the $98 million sale of the Australian business to two private equity firms last November.

Morrice downplayed the flat department store result, saying he was "encouraged" that the average spend per customer was up, although foot traffic was down in the period and continued to be flat into January.

"We are seeing a clear trend emerging where people are putting more in their basket on their average visit to the Warehouse," said Morrice.

Some product categories fared better than others in the move away from one-off sales to lower every-day prices. Toys and houseware were hit hard, but apparel and furniture flourished.

"Sales shortfalls in some categories has been greater than we anticipated. Obviously with any shortfall in sales the margin also falls short of our expectations," said Morrice.

At the same time, the retailer dropped Warehouse prices to lower levels than it had anticipated at the start of the financial year.

Forsyth Barr analyst Guy Hallwright said he had been expecting the New Zealand department stores sales to be rather flat.

"Everything was actually very close in line where we thought it would be," said Hallwright. He said he would maintain his full-year earnings forecast of $86 million, excluding one-off charges.

Macquarie Equities analyst Warren Doak also said the modest increase in New Zealand revenue had been anticipated for months. Like-for-like comparisons between periods did not tell the whole story, given the company's change of strategy away from short-term sales.

Doak expects the operational efficiencies to be paying off in spades by Christmas 2007.

By June, the Warehouse will open its first hypermarket or grocery and general merchandise store in Mt Wellington's Sylvia Park shopping centre.

The store will be outfitted with a pharmacy, liquor store and a cafe and the concept could be rolled out to up to 15 stores.

The company has earmarked $60 million over five years to expand its food offering and upgrade its existing retail network.

Warehouse Stationery's sales were up 4.2 per cent to $100.1 million in the period, with same-store sales up 0.3 per cent over last year.

Within the period, the company also reduced its debt by 55 per cent to $127 million.