Warehouse shares jump on 'recession-proof' profit result

Warehouse Group shares jumped more than 5 per cent after the biggest retailer on the NZX 50 Index reported its first margin growth in four years and announced a special dividend, underlining its ability to maintain profitability in the midst of recession.

Profit before unusual items rose to $85.2 million in the 53 weeks ended August 2, from $80.9 million a year earlier, Auckland-based Warehouse said in a statement.

That beat Forsyth Barr analyst Guy Hallwright's $83.5 million estimate. The profit margin at its Red Sheds widened to 7.9 per cent from 7.4 per cent, while sales fell 0.8 per cent to $1.72 billion.

The shares rose 5.2 per cent to $4.25 and have gained 15 per cent this year. Chief executive Ian Morrice said that given the "very difficult trading environment" the company is focusing on lifting gross margins, managing inventory and keeping a rein on costs. It will pay a special dividend of 10 cents a share together with an unchanged 5.5 cents final dividend.

Warehouse "offers the very attractive prospect of being able to turn its intrinsic advantages of scale and market share into highly defensible, ongoing incremental earnings growth," said Nick Dravitzki, manager of NZ Funds Management's Dividend Yield Portfolio.

"Management seems to be clearly focused on using the company's hard-won market power to provide investors with great returns," he said in a note today.

Chairman Keith Smith gave no guidance for the current year, saying "consumer spending is expected to gradually improve over the next 12 months but uncertainty remains as to whether the present upturn will be sustained."

Warehouse will give a sales update for the first quarter of 2010 on Nov. 1, he said.

In the year through June, net profit fell 15 per cent to $76.8 million, reflecting a $7.4 million charge to exit fresh food and liquor.

Figures yesterday showed New Zealand consumers increased spending on debit cards last month, with a pick-up in sales of big ticket items such as furniture and hardware.

Figures from Paymark, which processes more than 75 per cent of the nation's electronic transactions, show a 0.7 per cent increase in last 28 days of August, the second monthly advance of that size.

The Treasury this week predicted the economy is climbing out of recession this quarter, reviving from the worst slump in more than 30 years.

Warehouse's overall profit margin narrowed by 70 basis points to 4.5 per cent on a slump in profitability at its Warehouse Stationery outlets.

At Warehouse Stationery, full-year operating profit tumbled 69 per cent to $1.6 million, reflecting the impact of the recession on big-ticket items such as office furniture and technology products, it said. Sales fell 6.2 per cent to $187 million.

Operating profit at the Red Sheds gained 6.6 per cent to $120 million, as sales slipped 0.2 per cent. Warehouse strengthened its balance sheet in the latest year.

Net debt dropped to $47.2 million from $139.6 million and gearing reduced to 12.8 per cent from 29.4 per cent.The shares are rated a 'hold,' according to the consensus of 10 analyst recommendations compiled by Reuters.

NZ Funds' Dravitzki said that with low debt levels, its adjusted price-to-earnings ratio is less than 15 times, "cheap for a business with such market power."

- BUSINESSWIRE