Warehouse warns first half earnings to fall by up to 13%

The Warehouse Group [NZX:WHS], New Zealand's largest listed retailer, expects first-half earnings to fall about 20 percent as cold, wet spring and summer weather forced it to discount clothing and other seasonal merchandise at its 'red sheds' general merchandise stores and sales declined at its Noel Leeming consumer electronics chain. The shares fell 7.7 percent.

The Auckland-based company said adjusted profit will probably drop to $37 million in the six months ending Jan. 25, from $46.2 million in the year earlier period. The company had previously expected first-half profit would be in line with last year.

Warehouse shares are the worst performer on the NZX 50 benchmark index today, following the downgrade. Investors and analysts have said they want the company to produce profit growth this financial year after the retailer spent hundreds of millions of dollars overhauling stores and buying new businesses the past few years. The company, which has previously forecast a rise in annual profit, will update its guidance when it releases its first half earnings on March 6.

"They have been trying to reposition the business and invest in it and it's clearly not making much of an impact," said Craig Stent, a director and research analyst at Harbour Asset Management, which doesn't hold Warehouse among its $1.2 billion in equities.

"It's a tough environment and clearly that whole proposition may have lost its shine," Stent said. "They are a large business so getting any growth is pretty hard in dollar terms and you have got competing offerings in the market chipping away all the time at your product offering and it's pretty hard to compete."

Harbour would need to see the path for growth to invest in the company again, Stent said.

"These guys have been trying to get on that journey for the last two or three years and it hasn't really materialised so it's hard for us as a growth investor to get too excited about this sort of company."

Stent's comments were echoed by Nikko Asset Management's James Lindsay, which also no longer holds the stock among its investments.

"They have spent a lot of money over the last few years and that just hasn't been showing great results as far as getting either top-line or bottom-line earnings uplifts," Lindsay said. "The key driver still remains the red sheds and sales are not really going anywhere and margins are falling."

Similarly, Nikko would need to be convinced about the growth outlook to invest again, he said.

"There would have to be a sustained period of seeing that the capex was going to be providing ongoing uplift in sales and they were going to return to growth and that to me doesn't seem likely."

Shares in the company touched $2.83, their lowest level since Sept. 2012, and were recently down 24 cents at $2.87. Warehouse shares are rated an average 'sell' according to the estimates of six analysts compiled by Reuters.

Warehouse said the unseasonal spring and summer weather meant second quarter sales and margins at its general merchandise stores missed expectations, particularly in December. Meanwhile, Noel Leeming sales fell compared to the year earlier period when sales were boosted by a switch to digital TV, and as an expected Christmas sales rush "did not materialise".

"The combination of flat sales and lower margins in the Red Sheds and lower sales in Noel Leeming have magnified the impact on first half profits compared to last year," said chief executive Mark Powell. "It is not expected that we will see a similar level of decline in the second half."

Costs associated with the rebranding of the company's Noel Leeming and Torpedo 7 chains were one-time items that impacted the first half, and wouldn't be repeated in the second half, he said.

Warehouse said online sales at its 'red sheds' stores increased 30 percent on the year earlier.

However Nikko's Lindsay said that wasn't enough to offset sluggish instore activity.