Stock Takes: Is The Warehouse yesterday’s blue chip?

The Warehouse's share price has come under pressure after reporting a poor first half. Photo / NZME

A weaker-than-expected first half profit has seen shares in The Warehouse come under increasing downward pressure, to the point where the discount retailer can no longer be seen as the blue-chip stock of years gone by.

The result from The Warehouse saw the share price plunge 30 per cent in March alone.

At today’s price of $1.90 the stock has roughly halved since September last year when it was $3.75 and is down from $4.15 a year before that.

Pre-Covid, The Warehouse traded at around $2.80.

The company last month reported a first half net profit of $17.4 million, down 60.9 per cent, driven by a poor performance over the key Christmas trading period in most of its brands, as well as gross margin pressures and higher costs of doing business.

There was no dividend, compared with 10c paid in the previous comparative period.

Chief executive Nick Grayson said at the time that it had been a “challenging” trading environment, with high inflation and continuing cost of living pressures.

Salt Funds managing director Matt Goodson said there were now serious questions surrounding The Warehouse’s current path.

“It is a long way from being the blue chip large cap stock of years gone by and serious questions surround their current path which has seen a falling gross profit margin decline alarmingly close to their rising cost of doing business,” he said.

“This is happening at a time when they are carrying reasonable levels of bank debt and large lease liabilities,” he said.

“The market is saying they need to follow through on their plans to aggressively cut costs and also reconsider the future of loss-making businesses such as The Market and Torpedo 7.”

Greg Smith, head of retail at Devon Funds, said The Warehouse’s result was one of the worst in the retail space over the recent reporting season.

The stark difference between The Warehouse and outdoor goods retailer Kathmandu - which reported a first half net profit of $14.0m from a loss of $5.1m - highlighted the different stages the companies were at in their post-Covid recoveries.

“As we all know, consumers are under pressure,” Smith said.

“They are facing cost-of-living pressures and are coming off very low mortgage deals, so there is some pressure there.”

Electronics and whiteware retailer Noel Leeming makes up about 30 per cent of The Warehouse’s sales.

Smith said consumer surveys were pointing to changing habits, particularly when it comes to big ticket items.

“The majority of people still think it’s a bad time to buy a major household item, so companies that did well during the pandemic are now faced with a reversal of fortunes,” he said.

“Whiteware, big screen TVs were flying out the door during Covid, and they are not doing so any more.

“The other worrying thing about The Warehouse is that stock has been building on the shelves and they have had to discount more than they would have otherwise, and that has margin implications.”

In contrast to where Kathmandu, a post-Covid “reopening” stock with brands like Ripcurl, and with exposure to sportswear and outdoor goods, came in with a very good result.

“It was in stark contrast to where The Warehouse still is,” he said.

Furthermore, The Warehouse had gone from a net cash position of $150m to having net debt of $83m by the end of the half year.

Index change

Potential changes to influential share market indices are always a hot topic for the market, particularly with influential exchange traded funds (EFTS) using them as a base.

The market is always concerned about what stock might be included and what might drop out.

The latest ones to watch out for are potential deletions from the MSCI Small Cap Index for Precinct Property, Chorus and Sky City due to insufficient liquidity according to the measures that MSCI uses. This will be announced on Friday, May 12 (NZT), and implemented on May 31.

“We saw a significant impact on the share price of Argosy Property when it was deleted, so it could be quite important for the short-term performance of these stocks if they do get deleted as some are suggesting,” Salt Funds’ Goodsdon says.

“It also adds to questions as to what Chorus is thinking in doing a buyback at current share prices.

“They are trading at greater than 1.2 times their RAB (regulated asset base) and it is unclear as to whether they will actually even be able to charge their full regulated return in the future given competition at the margin from fixed wireless,” he said.

Goldman’s leap

Goldman Sachs New Zealand saw its profit leap last year with local directors taking the opportunity to pick up more shares in their New York parent company.

The local investment bank, whose ultimate parent is Wall Street’s Goldman Sachs Group, reported a net profit of $18.2m for the December 2022 year, a sharp rise on the $5.69m recorded in the 2021 financial year.

Total revenue from investment banking fees came in at $35.9m, up from $27.4m in 2021, while operating expenses declined from $19.4m to $12.3m.

Directors, including NZ-based Andrew Barclay and Justin Queale and Australian-based Simon Rothery and Conor Smyth, acquired shares in Goldman Sachs Group through an equity-based compensation arrangement.

Notes to the financial statements showed some 4568 shares were acquired at an average grant date fair value of US$330.71, while the aggregate value of director shares vested during the year was US$1.08m.

Goldman Sachs shares in New York recently traded at US$326.52 and are down about 6 per cent in the year to date.

Locally, Goldman has been active in M&A work, notably advising Pushpay on a controversial takeover offer from Aussie private equity firm BGH Capital and a large shareholder, Sixth Street Partners.

Goldman’s New Zealand performance somewhat mirrors its global parent with the Wall Street company reporting net income for the 2022 year of US$11.3 billion ($17.7b), its second-best performance since 2009.

However, its fourth quarter performance was markedly lower, with net income falling to US$1.3b, sort of short of analysts’ expectations of US$2.2b and down from US$3.9b in the same period last year. The global bank in January cut roughly 6 per cent of its workforce.