The Warehouse Group’s chief executive Mark Stirton says low margins are set to be the near-term norm as the company struggles to regain its value position in a challenging retail environment.
Despite flat sales year-on-year of $3.09 billion and an improved net loss of $2.8 million (up from a loss of $54.2m), operating margins, category mix and the need for a reset in its merchandising continue to impact its bottom line.
Gross margins fell from 33.6% to 32.2%, while the group’s earnings before interest and tax (ebit) fell 95.5% year-on-year from $28.9m to just $1.3m – a stark reality given the business’ scale.
No dividend was declared for the financial year to August 3.
Stirton said economic conditions were still hard and consumer confidence was at a low point, affecting the sentiments on bigger-ticket items.
“We’ve lost our ground in terms of our value positioning, particularly in our home and apparel categories, which are very important categories for us. We had to reset a lot of that,” he said.
“But sometimes what you have to do in order to gain back your market share and to keep fighting is that you have to reposition your assortments. That’s what we had to do last year across many things, particularly in The Warehouse and the Warehouse Stationery.”
Stirton said the situation was more mixed for Noel Leeming because of its greater focus on higher-priced items, including whiteware and technology.
But Stirton confirmed margins would likely remain deflated in the short term.
“You have to now get different sources of supply to make up for what you gave away in price to the customer. That’s a longer piece.”
The Warehouse Group, and particularly the Red Sheds themselves, face several challenges ahead.
While The Warehouse’s revenue increased by 1.4% year-on-year, the business made an operating loss of $12.2m (down 168.3%) and its operating margin fell to -0.7%. This means that the business is spending more on its day-to-day operations than it is generating in revenue.
The Warehouse’s gross margin percentage also fell, down 1.8% to 35.7%. This was largely down to a reset of its everyday low price items, as well as the growth of the grocery and non-food category, which contains beauty.
The growth in grocery and non-food items year after year is not lost on Stirton, who said it had given him some pause for thought.
“As soon as you let the category grow too fast, it actually has a disproportionate effect on mix, and margin mix in particular. It also influences how you run your store. Non-grocery is performing really, really well and grocery continues to perform well, but some of it is because of economic conditions.”
But would the business ever commit to becoming a grocer fulltime?
“The key thing in grocery is really around frequencies, how many times people come into the store and can you be known as a frequent, grocery retailer. I think that’s the key thing for us, can we lift our frequency to such a point where we can be known as a grocery retailer?
“At the moment, we’re still working on that as a hypothesis.”
Stirton believes an important part of turning around the key home and apparel category, and the wider in-store experience in general, is through its merchandising and presentation.
Having come from South African retailer Mr Price Group, Stirton said he noticed the difference.
“We had a multi-brand category and we had over 3000 stores. You see what good [merchandising] looks like and what average can look like, and you learn some lessons along the way. I think what we haven’t done well is that we haven’t actually injected a bit of fun and energy into our brand for some time.
“In our past investment cycle, we didn’t spend enough on our stores and the look and feel and the colour and the way people experience our stores was really not up to scratch from a believability perspective.”
Stirton said the company’s research told them that customers like shopping with the store, but the shopping experience needs to improve.
He said that it’s not just at the product level but also the store’s visual merchandising, noting that beds are being made properly for the first time and apparel has been reorganised with more mannequins, which is all part of upgrading its in-store storytelling.
Stirton said he was confident progress could be made in its 2026 financial year, given the business’ second-half performance in FY25.
In a trading update for the first seven weeks of FY26, sales and gross profit were at similar levels to last year and foot traffic was slightly down by 0.9%, but with conversion up 0.5% across the group.
The group is aiming to reduce its cost of doing business down to below 31% of sales (it currently sits at 32.2%).
Forsyth Barr analyst Paul Koraua said that the group’s margins were still going to remain under pressure over the next year at least.
“If the gross margin is going to come down, sales maybe do all right and gross profit dollars come down a few per cent, then what can they actually take out on cost in the year ahead is the main question. How do they get back to profitability without having to rely on the cycle saving them with topline growth?” he said.
Koraua was critical of the group’s profitability being dependent on improvement in higher-margin categories, noting that health and beauty will be competing against the Chemist Warehouse, while home is set to be competing against Ikea, which opens later this year.
As for where the business can save, the key for Koraua is the business’ head office cost, which currently sits at $250.2m, down 7.8% year-on-year.
“It feels like 2026 is probably still another challenging year for the group or for the Red Sheds at least.” Losing $12m “is quite a bad result when you put it against their history”, he said, noting the company had historically made anywhere between $70m and $100m.
Tom Raynel is a multimedia business journalist for the Herald, covering small business, retail and tourism.