Beefed-up management team tackles Aussie ills

Friday 4th May 2001

MORE THAN MEETS THE EYE: The Warehouse has its work cut out bringing the Australian stores up to New Zealand standards

By Nick Stride

The Warehouse is looking for a new Australian operations boss after teething problems forced it to shave $11 million off expected profits.

The discount retailer has told analysts their forecasts for the July year - which had been in the range $73-75 million - were about 15% too high.

These have now been revised to $62-64 million, down on last year's $70.1 million. That will end a four-year run of record gains.

The share price has reacted relatively benignly, losing 46c after the announcement but recovering to close at 569c on Wednesday, down less than 5%.

But analysts said there was more to the announcement than met the eye. There was evidence the company had taken its eye off the ball operationally while it concentrated on integration.

One cited the departure a few weeks ago of chief operating officer Greg Foran, a senior executive brought in from the New Zealand operation early last year.

Mr Foran - who was responsible for running the Australian day-to-day operations while Warehouse chief executive Greg Muir and Australian chief executive Dave Rickards concentrated on integration issues - went to Woolworths' chain Big W, one of The Warehouse's strongest competitors.

"Subsequent to his departure we've discovered a few things we're not happy with, so we're bringing in someone to replace him," group chief executive Greg Muir said yesterday.

At a board meeting last Thursday, Warehouse directors decided to clear slow-moving inventory - that is, sell it at clearance prices.

The move is expected to wipe out an expected $A8 million ($9.9 million) earnings before interest and tax contribution.

The group will also take a one-off $2.2 million hit from the exercise of executive options. The expense is caused by the difference between the 39% top personal tax rate and the 33% corporate tax rate but the company said the effect would be compensated for by having to issue fewer shares.

The Warehouse paid $A118 million ($146 million) for the 117-store Crazy Clints/Silly Solly's chain in August last year. The stores are being rebranded Clints Warehouse and Solly's Warehouse as an interim measure before they are brought completely under the Warehouse brand.

But the group has a heavy workload ahead of it bringing the Australian stores up to New Zealand standards.

UBS Warburg analyst Malcolm Davidson said the company had tried to get by with one merchandising strategy but had found it needed two for the different store sizes.

The average floor space for the 117 stores shown in the half-year report was 1162sq m, far smaller than the average 4045sq m for the 74 New Zealand stores.

Mr Muir said the company was moving toward the New Zealand model. New Australian stores - 12 have been opened since The Warehouse took over and another 12 will open by the end of 2001 - were on average three times the size of existing ones.

Mr Davidson said the previous merchandising strategy had fallen between two stools - too few product lines to attract footcount to the larger stores and too many for the smaller stores, leading to crowded, unattractive displays.

Among recent senior appointments has been head of buying John Coote from supermarket group Franklins. Mr Coote will devise strategies suitable to both formats.

Other senior appointments include head of IT Wayne Tozer from Coles Myer, logistics head Craig Timms from Buy.com, and head of human resources Michael Maddox.

Compounding the group's problems is the sharp fall-off in Australian retail sales since last August. The weak Australian dollar has also pushed up the cost of the imports which make up a substantial portion of Clints' product range.

Decisions will be made within three to five months on the level of capital expenditure needed on the supply chain. Mr Muir said existing distribution facilities would suffice for the next 18 months.

Today's group third-quarter sales are expected to show the New Zealand operations are in good heart, with a solid rise on last year's $232.2 million.

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