The Warehouse Group issues full year guidance, expects to post profit of $67m-$70m

The Warehouse Group expects to post full-year earnings of between $67-$70 million for the 12 months ending July 28.

In an NZX market update, New Zealand's largest retail company which operates The Warehouse, Warehouse Stationery, Noel Leeming and Torpedo7, said it expected to post $67-$70m adjusted net profit after tax in the 2019 financial year, an increase from its previous guidance of $63m-$66m, issued in March.

READ MORE: • The Warehouse prepares to launch TheMarket

The upgraded earnings reflect continued improvement in its trading performance and material reduction in debt.

The group expects its net debt levels to be between $60-$80m at balance date. It said the improvement in debt would reduce the group's financing costs.

The Warehouse had a turnover of $3 billion in the last financial year and is in the early stage of a business transformation.

A Forsyth Barr report notes the group's underwhelming results in recent years, but acknowledged more recent results show "early encouraging signs" due to continued operational and sales improvement and working capital gains.

"We retain a cautious stance with material risk at this stage of the transformation around execution, 'cost-in', and time to see results; but there are some early encouraging signs," Forsyth Barr analyst Guy Hooper said in a note.

"Despite difficult trading conditions in 4Q19 with warmer weather across New Zealand likely impacting sales of seasonal product, WHS still improved underlying trading performance. This is encouraging and is indicative of early execution on its business transformation strategy."

Hooper said the group's lower debt levels reflected working capital release from a reduction in inventory: "We expect inventory days to have fallen from 63 in the pcp to 55 at FY19, which is consistent with historic inventory levels."

The Warehouse, one of the country's largest employers with more than 12,000 staff, will announce its full-year result on September 25.

Next week the group will launch online marketplace TheMarket, which will sell mostly New Zealand and Australian brands and operate a subscription-based service.

Forsyth Barr said the company had highlighted international online retailers ASOS and The Iconic, a similar online offering in Australia and New Zealand, as key competition.

At its full year results presentation in September last year, The Warehouse said it expected trading improvements through the 2019 financial year as it optimised its operating model.

ShareClarity managing director Daniel Kieser said the group's result was encouraging as New Zealand's retail environment remained tough on the back of weak consumer confidence and cost headwinds.

"We've seen a number of companies downgrade their earnings like Michael Hill, Smiths City, Adairs, NoniB and the Reject Shop. So this was a positive result and better than what we were expecting," Kieser said.

Though he noted that the expected profit increase was largely the result of the group's lower debt and therefore lower interest expenses.

"It's still too early to say if the transformation is on track, but some of their new initiatives look good, like TheMarket retail platform. It has a good user experience and sits within a retail sweet spot.

"Amazon and Alibaba were the first to show favorability of online retail marketplaces. Kogan, which bought Dick Smith, recently launched their own marketplace and it is also doing well."

The Warehouse shares were trading at $2.20 at market close yesterday.