The Warehouse Group cops downgrade in ominous sign for sector

The Warehouse Group CEO Nick Grayston. Photo / Jason Oxenham

The Warehouse Group has copped a downgrade after a slow Christmas, and an uncertain economic outlook that could see consumers spending less this year.

Forsyth Barr has cut the retailer from outperform to neutral, and slashed its 12-month target price from $3.65 to $2.90. Shares closed yesterday at $2.66. The stock is down 25 per cent over the past year.

While Costco has hogged headlines, ForBarr analyst Andy Bowley told the Herald that the impact of the newcomer was a factor, “It’s just one factor. The macroeconomic environment is the much larger challenge.”

Bowley and colleague Margaret Bei cited weakening consumer demand, margin pressure and continued higher costs of doing business in a January 5 research note.

“Christmas sales were below our expectations as revenue fell across all brands (from -1 per cent to -12 percent) for the second quarter period from November 1 to December 26. While this is off a strong base, as the comparable prior year period benefitted from post-lockdown pending, the year ahead looks to be increasingly difficult for retailers.”

In a trading update, filed to the NZX on the evening of December 29, The Warehouse Group said sales for its busiest quarter were down 5.5 per cent on the year-ago period due to cost-of-living pressures pinching consumers’ wallets.

“We’ve continued to see the relative strength in The Warehouse as customers seek out value, however, we haven’t had sales momentum across our other brands,” group chief executive Nick Grayston said. Warehouse sales were off 1.3 per cent.

Warehouse Stationery’s sales were down 9.2 per cent on the year-ago quarter. Appliance and electronics retailer Noel Leeming’s sales fell 11.8 per cent and outdoor adventure store Torpedo7′s sales were knocked down 8.5 per cent.

Year-to-date FY2023 sales were $1.51 billion - a 6.4 per cent increase on $1.41b in the same period for FY2022 but below the inflation rate of 7.2 per cent.

Bowley and Bei noted the Warehouse Group did not provide its usual profit guidance with the update.

The pair cut their earnings estimate by a third. They now expect reported net profit to fall from FY2022′s $89.3m $70.5m.

They said The Warehouse Group is now trading at a 12x one-year forward price/earnings multiple against their revised forecast “and we believe the risk-reward is balanced”.

The Warehouse Group is trading in line with its immediate peers. Briscoe Group is trading at an 11.5x multiple.

ForBarr data has Costco priced at a 31.7 multiple.

“Costco is a growth business. They’re still rolling stores on a global basis,” Bowley told the Herald. A mature retailer was not going to trade anywhere near its PE ratio.

“You would write off Costco at your peril. They’re a formidable retailer with a very unique business model,” Grayston said at The Warehouse Group’s annual meeting on November 25.

Costco’s business model was testing whether NZ consumers would shop in bulk, which The Warehouse was very interested in.

The Warehouse had also received feedback that customers resented having to pay $60 – Costco’s membership fee – to go into a store, although the US retailers’ Westgate store has had constant queues.

Bowley said it was too early to gauge Costco’s effect. The US retailer is planning possible stores in Christchurch and Wellington.

Yesterday, Worldline (formerly Paymark) released figures showing retail spending increased 4.7 per cent in 2022, a drop in real terms given the annual inflation rate of 7.2 per cent.

Consumer spending for December was up 1.5 per cent on December 2021 and spending for the first week of January up 1.6 per cent.