Warehouse shares touch 18-month low as stock downgraded to 'hold' at Craigs

Tuesday 24th June 2014

Shares in Warehouse Group touched an 18-month low as the stock was downgraded to 'hold' from 'buy' by brokerage Craigs Investment Partners after the retailer cut its full-year earnings forecast, saying it was having to discount winter clothing and homewares because of warmer weather.

Craigs analyst Chris Byrne cut his forecast for the retailer's 2014 profit by 12 percent, the 2015 forecast by 6 percent and the 2016 estimate by 5 percent after Warehouse on Friday said its profit would decline from the year earlier and be lower than previously forecast as it cut profit margins at its 'red sheds' stores to move stock. Apparel makes up about a quarter of 'red shed' sales and normally generates higher margins, Byrne said.

Warehouse, New Zealand's largest listed retailer, is in the process of rejuvenating its 91 'red shed' stores. To expand group earnings, the company aims to grow the 'non-red' side of its business to be as large as the red sheds, having bought 11 businesses in 18 months, adding technology and appliance retailer Noel Leeming, outdoor sports chain R&R Sports and online sporting goods retailer Torpedo7.

"While New Zealand is having one of the warmest starts to winter on record and the 'red sheds' remain exposed to seasonal product lines, the timing is unfortunate given a lack of visibility over the outcome of Warehouse's reinvestment and acquisition strategy and the impact of online retail," Byrne said.

Warehouse shares touched $2.99 today, the lowest level since December 2012. The stock has declined 9.6 percent since Thursday's closing price, ahead of the profit warning on Friday. It was recently trading down 0.3 percent at $3.02, taking the stock's decline so far this year to 19 percent and making it the third-worst performer on the NZX 50 benchmark index this year.

While "recent share price weakness may, in time, prove a buying opportunity, we require evidence of earnings growth to get more positive," Byrne said.

The company's 'red shed' operating margins may have reached record lows, he said.

Warehouse may not be able to sustain its dividend level if it can't generate operating leverage in 2015 and beyond, Byrne said.

In March, Auckland-based Warehouse committed to a minimum dividend of 19 cents per share over the next two years as it moves to a lower payout ratio of between 75-85 percent of adjusted profit, from a previous policy of 90 percent of adjusted profit.

BusinessDesk.co.nz

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