The Warehouse Group's reinvented senior management incentive programme will eat into the NZX-listed retailer's first-half earnings.

Earnings for the retailer are expected to drop by up to 28 per cent in the first-half of the year despite an "encouraging" Christmas trading period.

In a NZX trading update, The Warehouse Group chief executive Nick Grayston said figures from its Christmas trading period were encouraging, but forecast earnings would be down between 22 to 28 per cent to $32-$35 million in adjusted net profit compared to the previous year. First-half earnings fell 13 per cent last year to $39.7m.

The company said the forecast drop in earnings "includes a significant accrual for a redesigned incentive programme, intended to reward better than expected financial performance along with reinforcing specific behaviours necessary to execute the transformation".

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Without incentive impact, "performance for H1 would be similar to last year", it said.

Research analyst Mohandeep Singh said a significant amount of that was due to implementing the incentive programme for its executive employees.

"If you took that incentive of accrual out then the financial performance for the first-half would be close to the same period last year," Singh said.

"They are flagging a relatively flat performance on the year before."

Singh did not have enough information on the incentive scheme to comment on whether it would be beneficial to the company's performance.

"They are effectively just keeping pace with what was already a really weak first-half [last year], which, from the face of it is a little bit disappointing. The only caveat to that is they are going through a transformational period in terms of back-end of operations."

Over the Christmas trading period 'Red Shed' same-store sales dropped 2.8 per cent compared to the first quarter rate of 4 per cent, while year-on-year unit sales increased 5.1 per cent with transactions rising 2.9 per cent.

"Yes, the trajectory is improving but the overall sales are still negative," Singh said.

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"Margin rates have generally improved. It doesn't matter if you're absolute sales number is falling a little bit — it's disappointing — but some of that will be purely to do with the change in going from a high-low model to a everyday low price model," he said.

"The key will be can they maintain or improve margins over the same period.

The Warehouse Group CEO Nick Grayston. Photo / Jason Oxenham
The Warehouse Group CEO Nick Grayston. Photo / Jason Oxenham

"The bit that is worrying is, if you take out the one-off accruals that they are talking about, the first-half performance in terms of earnings would be close to last year — that's the wording that they've used, and last year was down 13 per cent, so they're not really bouncing back from a poor previous period."

The company's share closed down 2.4 per cent at $2.06.

Christmas trading demonstrated an "improving trend despite the radical shift in go-to-market strategy in the Red Sheds", The Warehouse Group board said.

"While we are all keen to start delivering the benefits of our transformation, we have a long way to go, but these are encouraging signs," Grayston said. "H1 trading to date has confirmed for us that our customers like and have responded well to our pricing and product changes."

The retailer would continue to invest in technology and its team to execute the next steps in its change program, Grayston said.

The Warehouse Group, which owns The Warehouse, Noel Leeming, Warehouse Stationery and Torpedo7, had an annual turnover of $3 billion in the financial year ending July 30.

The Red Shed business accounts for about 80 per cent of group earnings. Noel Leeming was continuing to perform strongly while Torpedo7 had been improving.

The Warehouse Group share price was trading at $2.10 at midday yesterday, down 24 per cent over the past 12 months.

Full year-guidance will be given when it reports its first-half results on March 8.