Warehouse shares slump after cut to annual earnings forecast

Friday 20th June 2014

Warehouse Group shares fell to their lowest in 17 months after New Zealand's largest listed retailer cut its forecast for annual earnings because warmer autumn and winter weather crimped sales and margins of seasonal clothing and home products.

Warehouse expects adjusted full-year profit of $59 million to $62 million, down from its March forecast for $67 million to $71 million, and down from $73.7 million last year, the Auckland-based company said in a statement.

Warehouse, which makes about 70 percent of sales from its general discount stores, said it was having to sell seasonal stock at reduced margins to avoid having too much left at the end of the season. Autumn this year was about half a degree warmer than normal in Auckland and Wellington and heading into winter, North Island June temperatures are about 1 degree warmer than normal, according to MetService.

The broader rag trade is struggling in New Zealand in the face of online competition, discounting and soft demand. Hallenstein Glassons and Pumpkin Patch are struggling to boost earnings while Just Kids closed and Postie Plus appointed administrators after lenders withdrew support.

"The retail environment out there is still relatively difficult," said Grant Williamson, a director at brokerage Hamilton Hindin Greene. "It seems to be particularly so for the clothing retailers. It is a pretty difficult market, there's a lot of conditions that can go wrong and force a company to have to downgrade their earnings."

Shares in Warehouse touched $3.01, the lowest since January 2013. The stock was recently down 5.7 percent to $3.13, extending their loss the past year to 17 percent.

"Investors have been pretty harsh on the stock," said Williamson. "It's an indication that investors are pretty nervous. This is not the first downgrade that the Warehouse has had. Management are finding it difficult to forecast exactly what earnings they can produce and it just makes investors a little bit wary."

Still, Williamson said the shares may not decline further as the conditions leading to the latest downgrade are temporary and less relevant to longer-term investors, while bargain hunters may start buying. Nevertheless, the stock is unlikely to rebound significantly "until the company can prove that they can turn the performance around".

Warehouse is in the process of rejuvenating its 91 distinctive large format '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 sales in the Red Sheds are still above last year, sales of seasonal apparel and home products are below plan and are increasingly having to be sold at decreased margins to maintain seasonal sell-through and avoid end-of-season overstocks," the company said. "Over the last three weeks there has been a material deterioration in sales and margin versus plan in the Red Sheds and it is likely the remaining winter season will see discounted trading in the market, with limited opportunity for full margin sales.

"These market conditions add further unpredictability to the remaining June and July trading environment."

Torpedo7, which is being integrated with R&R Sport, No.1 Fitness and Shotgun.co.nz, also failed to meet profit expectations as sales lag forecasts, Warehouse said. The company's Noel Leeming, Warehouse Stationery and Financial Services units were all performing in line with profit expectations, it said.

“The revised guidance is representative of a particularly difficult seasonal trading environment," chairman Ted van Arkel said in the statement. "However, the reshaped TW Group has developed a stronger base and significant opportunities for growth. In the next year the focus will be on consolidating the changes made and leveraging profitable growth.”

The stock is rated an average 'hold', according to analysts polled by Reuters.

BusinessDesk.co.nz

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