Turnaround policy puts dent in forecast six months profit

The Warehouse Group has flagged a drop in interim profit after strong Christmas trading failed to offset a decline in first quarter margins, but expects an improved performance in the second quarter to continue into the final half of its financial year.

Adjusted net profit for the six months to the end of January is forecast to be in the range of $46 million to $48 million, the Auckland-based retailer announced in a post-festive season trading update yesterday. That would be a decline of up to 13 per cent on the $52.9 million adjusted net profit the company reported for the same period a year earlier.

The Warehouse Group's first half trading profit - earnings from its retail business rather than other income streams such as rental properties - was likely to fall by only 1 to 2 per cent on the prior comparable period, the company said.

Its turnaround strategy, which has involved a major investment in store re-fits for the Red Sheds and new retail brands, as well as acquisitions such as electronics retailer Noel Leeming, had resulted in increased funding costs and a reduction in rental income.


"The adjusted NPAT (net profit after tax) decline is exaggerated because of that funding structure and the property sales," said chief executive Mark Powell.

The company has said "structural declines" in categories such as books, CDs and DVDs - as well as transitions to new product ranges - had caused the first quarter margin problems.

"There was a multiple number of issues that came together in that quarter and they were all very much short-term," said Powell.

The Red Sheds are expected to post a 4 per cent rise in same store sales for the first half, as well as a recovery in gross profit margins during the second quarter to the levels seen in the same period of the previous year, according to yesterday's trading update.

The Warehouse warned shareholders at its November annual meeting that interim profit could fall below last year's, and shares closed down 17c at $3.55 last night.

Powell said he was feeling "reasonably comfortable" about the outlook for the second half of the financial year.

"You never relax in retail (but) the trends are good coming out of Christmas," he said. "We've put a lot of hard work in and we've now had 12 quarters of (same store sales) growth in the Red Sheds and that's been pretty sustained now over three years."

Retailers also stand to benefit from rising consumer confidence, which has hit a seven-year high according to an ANZ-Roy Morgan survey released yesterday.


The Warehouse Group chairman Ted van Arkel said the board remained fully committed to the turnaround strategy that would "best navigate the ongoing changes in the retail market in order to create long-term value for our shareholders".

The company has made more than eight acquisitions and investments since late 2012, including its $65 million buy-out of Noel Leeming and its purchase of a 51 per cent stake in online sportsgear retailer Torpedo7.

Last week it announced it had entered a conditional agreement to acquire the Schooltex school uniform brand and stock from Postie Plus.