The Warehouse Group shares dropped 8% to $2.87 after New Zealand’s largest publicly listed retailer said profit may fall between 10-and-15% in the first half of its financial year on a weaker-than-expected run up to Christmas.
"We were a little surprised at the magnitude (of the downgrade). Obviously they have their challenges," said Paul Harrison, portfolio manager at Salt Funds Management. "They are facing all sorts of competitive threats from new entrants and also online."
The retailer, known for its general merchandise 'red shed' Warehouse stores, faces significant headwinds from online platforms like China’s Alibaba as well as others that offer heavily discounted merchandise. In its latest monthly update on online retail sales, Bank of New Zealand said online retail sales at local sites were up 11% in October versus the same month a year earlier but were up 17% at offshore sites in the same period.
Mr Harrison said the time may have come for the Warehouse to “resize the business” into something more appropriate as the “days of massive red sheds the length and breadth of New Zealand” has likely passed.
Looking ahead, he noted the falling New Zealand dollar will only add to the challenge as the company faces higher import costs that will be difficult to pass on to customers. The New Zealand dollar is currently trading at a six-month low, weighed by a buoyant US dollar thanks to president-elect Donald Trump's promises to cut taxes and spend more and the Federal Reserve's plans to raise interest rates faster than the market had expected.
The Auckland-based company said its adjusted net profit is expected to be between $38.5 million and $41 million in the six months ending Jan. 29, 2017. Warehouse will release its complete first-half earnings on March 9, 2017, and provide an update on its strategy and plans to reduce costs, it said.
The Warehouse Group says profit may fall between 10-15% in its first half its financial year as New Zealand's largest publicly listed retailer contends with a weaker-than-expected run up to Christmas both at its stores and its financial services business.
Investors reacted negatively, marking the stock down 30c, or 9.62%, to $2.82 - wiping more than $100 million off the company's market value.
Adjusted net profit after tax is expected to be between $38.5 million and $41 million in the six months ending January 29, 2017, the Auckland-based company said in a statement. The Warehouse will release its complete first-half earnings on March 9, 2017, and provide an update on its strategy and plans to reduce costs, it said.
More than half of the retailer's sales are generated by its general merchandise 'red shed' Warehouse stores and the second quarter of its financial year includes the peak Christmas period and generates most of the group's sales and profit in its first half. The company warned at its annual meeting last month that it would probably write down the value of its financial services business due to weaker-than-expected trading.
"While sales growth has continued at The Warehouse, margin pressure in the face of an increasingly competitive retail environment, combined with a below expectation performance from Financial Services, as previously indicated at the group's annual meeting, are the two main contributors to the lower profit expectations," The Warehouse said.
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