Special Report: The Warehouse - A Tough Year Ahead

By Perry Williams, ShareChat Wellington Correspondent

Friday 26th January 2001

When the new chief executive of The Warehouse, Greg Muir, unveils the company's second quarter figures on February 9, there is widely expected to be a collective groan amongst much of the sharemarket community. Its share price, currently hovering at $5.60, may take a fall as the details of a difficult last three months emerge. Looking further ahead, the discount retailer faces a challenging year as it rolls out its Australian expansion and looks to the financial sector back home in New Zealand. Perry Williams reports.

2000 was a year of change for The Warehouse. It reported a bumper profit for the July 2000 year of $70.1 million (a 29% jump from the previous year). Analysts are forecasting an average net profit for the year to July 2001 of $82.8 million.

Its share price has been moving around like a jackhammer with uncertainty continuing over the likely profit contribution from its Australian purchases, Clint's Crazy Bargains and Silly Solly's. That combined with a tough retail environment in New Zealand has meant the traditionally booming Christmas period has been a little softer.

The Warehouse's former managing director, Stephen Tindall, now to be known as company founder, has previously told shareholders that about a quarter of the year's trading was done over the Christmas period. Important stuff indeed.

Although same-store sales at The Warehouse in New Zealand were up 5.5 percent in its first quarter, the second quarter NZ sales are expected to be hit by the generally difficult economic environment..

That, combined with the introduction of the new chief executive, Greg Muir, signals a time of change for the group as its ability to create more profit from New Zealand operations begins to dry up.

The group's share price has been dropping, but analysts aren't yet worried. The general consensus seems to be that the company is now trading at a more realistic level after warnings about the aforementioned Christmas season and the performance of its Australian chains.

ABN Amro analyst Gary Baker said the high of $6.85 reached in mid-November could not realistically be sustained but he agreed the current share price could take another fall in a few weeks if the group reports a "soft" result.

"Certainly for same store sales, I think it will be a bit softer. It's no secret the Christmas period was not the best."

However, Mr Baker discounted suggestions the market was getting the jitters over the performance of the Australian operation.

"The company has made it clear there won't be any significant results from the operation until Year 3 and that still holds true."

Still, the question lingers over whether The Warehouse can conquer an Australian retail market already close to saturation.

The Warehouse chose to enter the bargain segment of the general merchandise market in Australia. This is fairly small, with sales of about $A1 billion a year, or just 2.5% of all non-food retail sales in Australia. However, analysts have suggested this part of the market does have big growth potential, as discount department stores like Target move up market, losing some of their popular appeal.

It's expected that in five years, the Australian side of the business was likely to outgrow the New Zealand arm given the New Zealand department store market was worth just $2.2 billion.

Analysts have suggested Coles Myer - without a cut-price retail offshoot - could face a threat from Solly's and Clint's with The Warehouse moving to bridge the gap between the bargain and discount department stores.

Yet, the Australian market is more competitive and profit margins are lower. In New Zealand, The Warehouse achieved about a 10 percent ebit over sales margin, compared with 4.9 percent for the Australian business it was acquiring.

Another analyst who spoke to ShareChat said it was likely The Warehouse would increase the profit margin in the Australian business through efficiencies, but it may not reach the 10 percent mark.

The Warehouse's chief financial officer, Brent Waldron, said he couldn't make any comment on the Australian side of the business. An overview of its performance over the last three months would be made on February 9.

Mr Waldron was, however, keen to confirm that the company would be making an announcement soon on its plans to introduce financial services. Five months after it revealed it had abandoned its plans for a joint venture with one of the big five banks, the country's biggest retailer is understood to be well down the track with another partner.
That plan means banking services for The Warehouse this year.

"We've certainly been working on a proposal and studying it very carefully. We'll be making an announcement soon," Mr Waldron said.

ANZ and WestpacTrust are understood to have been in talks with The Warehouse, though neither would confirm this.

Analysts have said The Warehouse would want its own branding and ownership of customers in any banking service, and this was likely to be resisted by banks.

WestpacTrust, which supports The Warehouse's credit card, ended a bank kiosk trial with the company in Wellington at the end of 1999.

The Warehouse is not the only retailer considering breaking out into banking. Farmers moved into mortgage broking last year and Progressive Enterprises, which runs the Foodtown, Coustdown and 3Guys supermarket chains, is also considering banking services.

Analyst Gary Baker said the financial services announcement would be the one to look out for this year.

"There's obviously a lot of importance attached to that but it's all speculation at this stage."

So then, what are the company's future prospects in New Zealand?

Contrary to opinion which suggests it has grown as much as it could, some analysts, including Mr Baker, said The Warehouse was still taking market share from its main competitors, such as Farmers Deka and Kmart stores. It is also expected Warehouse Stationery, which lifted sales 46.6% to $19.2 million in the last quarter, will continue to grow.

Thus an interesting year is ahead for The Warehouse and its shareholders. All eyes will be on the new chief executive Greg Muir to see if he can successfully navigate his company through the stormy waters ahead.

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