The Warehouse Group has reported a 65.6 per cent drop in annual profit.
The Warehouse Group has reported a 65.6 per cent drop in annual profit.
Margins at most of The Warehouse Group’s brands are getting crushed under the weight of inflation, but its poor management of costs puts it at the bottom of the retail ranks, according to analysts.
The country’s largest retailer, which owns The Warehouse, Warehouse Stationery, Noel Leeming and Torpedo7, reported a65.6 per cent drop in annual profit to $29.9 million on Thursday.
That’s despite sales rising 3.2 per cent to $3.4 billion in the year to the end of July.
“It’s slightly worse than I was expecting,” Craigs Investment Partners equity research analyst Kieran Carling told the Herald.
“They’re at the bottom in my preference for retail stocks. I think they’re making some mistakes.”
Carling pointed to Torpedo7 as “a real pain point” for the group.
The outdoor gear brand made an operating loss of $22.2m in the year ended July, with margins contracting by 13.7 per cent - The Warehouse Group’s worst-performing brand.
Chief executive Nick Grayston told the Herald that brand was facing “a number of different issues,” including costs and a drop in demand as consumers cut back on buying leisure items like bikes and snow gear.
“It’s clear that our customers have had a tough year, and we’ve had a tough year alongside them.
“We’ve seen, coming out of Covid-19, a significant change in how people have used disposable income. People have spent money on restaurants and travel, and so you know that disposable income changes particularly hit things like TVs and refrigerators and high-ticket items.”
The Warehouse Group's Torpedo7 outdoor brand is its worst performing. Photo / Dean Purcell
Margins - a measure of profitability - also contracted at Noel Leeming and The Warehouse, taking the total group margin lower by 170 basis points to 1.8 per cent in the year.
A plan to improve profitability and reduce costs in the business was under way, Grayston explained.
“We’ve now moved the Torpedo7 business into our agile operating unit within our central office... And we’re looking at other product categories that we might get into.”
Jarden equity research vice president Guy Hooper was dubious about its ability to improve.
“While the company has outlined cost control and a recovery track for Torpedo7, we remain cautious, given a poor track record of delivery,” he wrote in a note to clients immediately after the result.
The company cut 320 jobs in April as part of a cost-cutting programme.
The Warehouse Group chief executive Nick Grayston is focused on cutting costs. Picture / Jason Oxenham
Retail recession?
Carling said The Warehouse Group was facing the same pressures as all New Zealand-based retailers right now.
“We are seeing that consumer environment deteriorate.”
Other retailers like Kathmandu were experiencing inflated costs in factors like wages, he said.
Devon Funds head of retail Greg Smith said in an emailed note that The Warehouse Group’s result was representative of a cost-of-living crisis.
“Demand for essential everyday items and cheaper wares has remained strong, but less so for those on the discretionary side.”
Vying for value
Grayston said the retailer wanted to keep offering value to Kiwis amid a cost-of-living crisis, especially in its growing grocery division - even though lower-value products earned the company less.
“There are essential items that Kiwis need, and we worked hard to take the prices down wherever possible on those,” he told the Herald.
However, it seemed there was still room for those prices to drop. Grayston pointed at the grocery “duopoly”, which he believed was keeping prices higher than they otherwise should be.
He said the Commerce Commission’s investigation into the grocery industry had not yet helped.
“We have struggled to get access to affordable prices and wholesale supply.”
The Warehouse Group is going hard on grocery, in a bid to break up the 'duopoly'.
The Warehouse Group’s shares were trading at $1.72, down 1.71 per cent, by early afternoon. The company’s share price has fallen steeply in the past two years, having traded at $4.11 in December 2021.
Madison Reidy is the host of New Zealand’s only financial markets show Markets with Madison. She joined the Herald in 2022 after working in investment, and has covered business and economics for television and radio broadcasters.
