Warehouse hits 15 month low as growth reputation tarnished

By NZPA

Wednesday 5th February 2003

Shares in The Warehouse struck their lowest point in well over a year today after a weak quarterly sales report tarnished its reputation as a growth stock.

Sales in the three months to January 31 -- a key quarter for the discount retail giant -- rose just 5.3 percent to $657 million compared with the same period a year ago, as a rural downturn and poor weather dampened consumers' spending appetites.

Analysts had expected a figure more in line with last year's 13 percent rise.

Adding to the misery, the company's chief executive Greg Muir forecast net profit for the year to July would clock in at $90-95 million -- well shy of market estimates of between $106 million and $117 million.

That saw the shares plummet as much as 91c, or 12.9 percent, to $6.17 -- their lowest point since October 2001 -- as investors removed some of the "growth premium" from the stock. The shares closed at $6.20.

The Warehouse's market capitalisation was slashed by $266 million to $1.9 billion.

"It has disappointed the market," a local broker said.

"The stock had been priced as a growth stock... the market will take some of that growth premium out in the coming weeks."

The Warehouse, a top five stock, has been a star of the market since it floated in 1994, recording mostly double-digit profit growth.

Today's figures were a shadow of their former glory, with the company's core New Zealand "Red Sheds" division recording overall sales growth of just 3.2 percent for the quarter, while same-store sales (excluding newly opened stores) increased by a mere 1.4 percent.

"Sales were affected by the poor December weather impacting categories such as summer and sporting merchandise," Mr Muir said.

The company also estimated New Zealanders spent about $30 million before Christmas on game consoles like Playstation 2 (PS2) and Xbox -- neither of which The Warehouse stocks.

" Instead of buying a beach towel and a water gun and a few other things for their children, people might have just bought one present for the family and that was a PS2 or an Xbox.

"People were being a little circumspect over Christmas and not overspending," -- particularly in the rural sector as lower export returns kicked in, Mr Muir said.

The group's Warehouse Stationery and Warehouse Australia divisions performed better during the period, recording sales growth of 21.7 percent and 20.3 percent (in Australian dollar terms), respectively. Same store sales were 19.9 percent ahead for the stationery division and 4.6 percent in Australia.

Mr Muir said the second quarter result was an "abberation" with sales bouncing back strongly in January once the warm weather set in. Total sales in January were up 7.2 percent, while same store sales were 5.2 percent ahead of the same month last year.

"We still have a significant amount of growth ahead of us, both in terms of same-store sales and in rolling out more square footage," he said.

New Zealanders' appetite for the Red Shed one-stop-shop format was not saturated yet, he added.

"There's at least another 100,000sq/m that we intend to roll out over the next 2-1/2 to 3 years. A number of major provincial cities still need a second store and there are still a number of provincial towns where we are getting a request from the community to build stores," Mr Muir said.

The quarter was a wake up call, however.

"It has given us the perfect opportunity to review everything that we do. The Red Shed team will certainly be a lot more focused," Mr Muir said.

He said The Warehouse' second quarter performance could not be compared with that of fellow discount retailer Briscoe Group -- which earlier this week recorded an 18 percent increase in total sales for the quarter ending December 31.

"Briscoes is a category killer. They work in a small number of discrete categories," Mr Muir said.

"It's relatively easy to grow category killers because you're tightly focused on what you are doing. The Red Sheds are selling a whole raft of categories and it is a lot harder to do. "

The Warehouse expects to post a flat after tax profit of between $57 million and $59 million for the year to January 31 -- taking into account a previously flagged $A7 million ($NZ7.6 million) restructuring charge in Australia -- when it reports on March 10.

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