Warehouse margins shrink in first-half as sales rise

BUSINESSDESK: Warehouse Group, the biggest retailer on the NZX 50 Index, reported a decline in operating margins at its Red Sheds and stationery stores, and cut its interim dividend. A one-time gain lifted net profit by 3.3 percent.

Profit rose to $54 million in the six months ended Jan. 29, from $52.3 million a year earlier, the Auckland-based company said in a statement. Sales rose 3.3 percent to $937.9 million. Profit included about $7.4 million from the release of warranty provisions on the Warehouse Australia business it sold in 2005 that expired in December.

Warehouse 12-month chart. Source: CapitalIQ. Click to enlarge.

Excluding the gain and other one-time items, adjusted profit fell to $46.7 million from $53 million. While the retailer managed to lift sales, it did so at the expense of margins. In its Red Sheds, the operating margin fell to 7.4 percent from 9.2 percent and at its stationery outlets it shrank to 3.1 percent from 3.7 percent. That led to a 14 percent drop in operating profit to $67.9 million.

Sales growth was "encouraging with the start of an improving same-store sales trend that has continued into February," the company said. "Sales leverage has led to increased gross profit dollars, but not sufficient to cover inflationary and strategic investment costs in the half."

Warehouse will pay a first-half dividend of 13.5 cents, down from 15.5 cents a year earlier.

The company kept its guidance for the full-year for an adjusted net profit of $62 million to $66 million, down from $76 million in 2011. The net profit forecast was affirmed at $80 million.

"Trading conditions (are) expected to remain uncertain in the remainder of the financial year," it said.

Net debt rose to $198.4 million from $103.9 million in January 2011. That reduced its annualised interest cover to 11.4 times EBIT from 13.3 times a year earlier.

Sales at the Red Shed rose 3.4 percent to $835.7 million while operating profit fell 16 percent to $62 million. Warehouse Stationery lifted first-half sales by 2.1 percent to $100 million and operating profit fell 15.5 percent to $3.1 million.

The shares climbed 3.1 percent to $2.65 in trading yesterday, and have shed 15 percent this year.  

The Warehouse [NZX:WHS] was up 0.75% to $2.67 in mid morning trading.