Warehouse profit warning raises concerns about outlook for core business, acquisitions

Mark Powell, Warehouse Group Chief executive
Warehouse Group 12-month price history (NZX.com)

Warehouse Group's [NZX: WHS] profit warning last week, which erased $94 million from the retailer's market capitalisation, has raised concerns about the outlook for both its core business and the success of its acquisition strategy.

The company's shares have shed 8.1 percent since it announced on Friday that profit this year would be lower than it previously estimated as it cuts margins to boost sales of seasonal winter stock at its core 'red shed' stores which have been crimped by warmer weather, and after sales and profits lagged forecasts at its Torpedo7 unit.

Warehouse, New Zealand's largest listed retailer, is in the process of rejuvenating its 91 'red shed' stores, which account for about 70 percent of sales. 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.

"The downgrade creates concern around the core business and future earnings growth," Forsyth Barr analyst Chelsea Leadbetter said in a note. "Red Sheds has been a repeat offender behind recent downgrades despite significant capital invested in the store base."

Auckland-based Warehouse acquired a 51 percent stake in Torpedo7 in April 2013 and has since raised its holding to 80 percent. Since Warehouse first invested in the business, Torpedo7 has acquired online fitness equipment retailer No.1 Fitness, online sports supplements company Shotgun Supplements and outdoor sports apparel and equipment chain R&R Sport.

"Integration of new acquisitions does take time, however missing sales targets at such an early stage of Warehouse ownership does trigger concern," said Leadbetter. "There remains considerable execution risk for Warehouse's Torpedo7 division, as earnings and sales growth is still unproven."

Forsyth Barr has an "underperform" rating on Warehouse stock and Leadbetter downgraded her earnings expectations for the coming three years by 12 to 13 percent following the profit warning.

The company's stock recently traded down 1 percent to $3.05.

(BusinessDesk)

This article is tagged with the following keywords. Find out more about My Tags

NZ Market Snapshot

Forex

Sym Price Change
USD 0.7733 -0.0013 -0.17%
AUD 0.9501 -0.0003 -0.03%
EUR 0.6313 -0.0023 -0.36%
GBP 0.4955 -0.0002 -0.04%
HKD 5.9975 -0.0098 -0.16%
JPY 92.7030 0.1190 0.13%

Commods

Commodity Price Change Time
Gold Index 1195.4 -2.890 2014-12-19T00:
Oil Brent 61.4 1.580 2014-12-19T00:
Oil Nymex 57.1 2.910 2014-12-19T00:
Silver Index 16.0 0.096 2014-12-19T00:

Indices

Symbol Open High Last %
NZX 50 5527.8 5553.7 5527.8 0.25%
NASDAQ 4759.0 4779.2 4765.4 0.20%
DAX 9827.3 9924.0 9787.0 0.81%
DJI 17812.2 17911.6 17804.8 0.49%
FTSE 6545.3 6620.9 6545.3 0.48%
HKSE 23264.0 23478.9 23116.6 1.26%
NI225 17685.5 17692.6 17621.4 0.08%