Warehouse's ugly one delivers goods

Friday 9th November 2001

The latest Warehouse Group annual report is just like its stores: plain, red and cheap.

Photographs of executives are in monochrome and look as though they've been taken on a Box Brownie as they hurry to their next meeting. Others show staff members or customers, with only their clothes or neighbouring Warehouse signs highlighted in bright corporate colours.

Text is laid out in an unrelenting wall of grey, two columns to the page, unencumbered by fancy graphics.

This is, of course, exactly as the company wants it. Anyone reading this document will be under no illusion that The Warehouse is devoted to minimising costs and perhaps even that content is more important than the packaging.

This report is notable for covering the first year of chief executive Greg Muir, the hand-picked successor to company founder and major owner Stephen Tindall.

It may only be bad timing, but he has delivered a 14% decline in net profit to $60.7 million on sales up 55% to $1.66 billion. Net profit margin has slumped to 3.6% from 6.6%.

Most of the big jump in sales came from its new Australian division, which was created by taking over two discount retailers - known as Crazy Clint's and Silly Solly's. Thanks to a convenient divisional breakdown in Mr Muir's review, readers can see that the Australian division made a loss of $1.5 million on sales of $404 million.

He explains that "much of our weak result in Australia reflects execution difficulties with our format transition, which were further compounded by our decision in April 2001 to quit excess inventory".

This appears to be a long-winded way of saying somebody stuffed up and a clearance sale was needed.

This sort of dissembling is thankfully in short supply and much of Mr Muir's review is a clear and informative description of the business and its opportunities and challenges.

One point that emerges is that the company has spent a lot of money in the past year that will take two years or more to begin delivering benefits. These include the Australian operations, additional Warehouse Stationery outlets and a substantial new online business-to-business venture.

The report also contains an extensive "triple bottom line summary report," its first, showing the company's economic, social and environmental impacts.

One of the findings relating to shareholders is that someone who invested $1000 when shares in The Warehouse were floated in 1994 would by September 30 this year have a holding worth $7197 after reinvesting dividends. That is a compound annual return of 36.5% - one of the best on the market.

"It is performance like this that keeps shareholders happy," the report states needlessly.

This is followed by a fairly standard corporate governance statement, then several pages of feel-good prose about the company's various divisions.

It is not until page 22 that readers come to the "founder's report," a single-page letter from Stephen Tindall. Although likely to be the best-read part of the document, it offers no revelations. This may be to avoid stealing the thunder from Mr Muir, whom Mr Tindall describes as "the ideal steward of our assets and our future."

Two pages are devoted to a very impressive 10-year performance review, chock full of useful ratios and statistics.

From this we learn that the operating margin is the lowest since 1996 but that net return on assets is the third-best performance in five years. Equity to total assets has slipped from a little under 50% to 41% in two years and net debt to equity has jumped from 38% to 87%.

These can be explained away as the short-term impacts of expansion, but investors will be looking for an improvement in the next year or two. Incidentally, these figures are very similar to 1996, when The Warehouse had one of its rare bad years.

This report offers a good level of disclosure and presents itself well but is distractingly unattractive. However, from the perspective of those shareholders enjoying a 36.5% compound return on their 1994 investment, it could be written in crayon on the underside of a Warehouse pallet for all they are likely to care.

David McEwen is an investment adviser and author of weekly sharemarket newsletter McEwen's Investment Report. Internet: www.mcewen.co.nz. Email: davidm@mcewen.co.nz

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