Warehouse’s strong second half sets platform

the warehouse2

The board of The Warehouse Group announced today an adjusted net profit after tax for financial year 2015 of $57.1 million, which is above the guidance range of $52-$56 million previously indicated to the market. Group retail sales for the year were $2,770.4 million, up 4.6 per cent compared to last year.

The group has rebounded strongly from a challenging first half year, with its second half adjusted net profit increasing 37.4 per cent, from $14.5 million in the second half of 2014 to to $19.9 million in the second half of 2015. As a result, the full year financial year 2015 adjusted net profit after tax (for a 53-week period) of $57.1 million was 5.9 per cent lower than last year (for 52 weeks), having been down 19.4 per cent at the end of the first half.

Reported net profit after tax was $52.4 million. Gains on property disposals were offset by a non-cash writedown in the carrying value of the Torpedo7 Group, particularly No.1 Fitness, Shotgun Supplements and R&R Sport.

The Warehouse’s (Red Sheds) same store sales growth in the fourth quarter was 0.6 per cent. The Red Sheds have now reported 18 consecutive quarters of same store sales growth. Second half operating profit in Red increased 56.6 per cent from $16.3 million in the second half of 2014 to $25.5 million in the second half of 2015. For the full year, Red Sheds operating profit was up 3.5 per cent year on year, compared to being down 10.7 per cent in the first half.

This strong second half recovery was achieved by translating sales and margin growth into profit leverage. Particularly strong growth was seen in the core home and apparel categories, more than making up for the continued systemic decline in CDs, DVDs, gaming and books. This is reflective of the ongoing “House of Bargains” and “Home of Essentials” strategy in Red. This strong second half trading result was also helped by favourable winter temperatures. The focus is now very much on profit leverage through “better products and better prices” to drive sales growth, and cost and working capital control.

Warehouse Stationery same store sales growth in the fourth quarter was 1.7 per cent. Warehouse Stationery has now reported 24 consecutive quarters of same store sales growth. This growth supported by strong cost control, resulted in profit leverage, with operating profit increasing 7.9 per cent from $11.8 million in financial year 2014 to $12.7 million in financial year 2015. The business is well placed competitively to continue steady sales growth and profit leverage through its “work, study, create, connect” strategy.

Noel Leeming continues to grow market share with same store retail sales growth in the fourth quarter of 8.5 per cent. Its focus on people and services continues to differentiate itself in a highly competitive technology and appliances market. Financial year 2015 operating profit decreased 43.2 per cent from $11.3 million in financial year 2014 to $6.4 million in financial year 2015. The first half impact on operating profit of cycling the digital switchover and one-off rebranding costs were not able to be recovered in the second half.

Torpedo7’s financial year 2015 was a year of significant change in Torpedo7, with results impacted by the rebranding of the business and the integration of R&R Sport, No.1 Fitness and Shotgun Supplements. As a consequence, operating profit decreased from $1.1 million in financial year 2014 to just above breakeven in financial year 2015. Total Torpedo7 sales grew 21.9 per cent in the year and since March the business has been able to focus solely on trading with very encouraging results. Torpedo7 is well placed to take advantage of the growing outdoor and adventure sports market in financial year 2016.

The creation of the new Financial Services business continues on plan and the financial year 2015 loss of $1.8 million is in line with expectations. The group will launch the first phase of its financial services products before Christmas.

All of the group’s retail brands are fully online. In addition to straight forward home delivery, all brands offer Click and Collect and Endless Aisles (order extended ranges from within smaller stores) omnichannel services. The New Zealand online sales have grown organically and through acquisition, from $18.8 million in financial year 2011 to $149.2 million in financial year 2015.

The strategy of the last four and a half years to “Keep the Red Core Strong”, “Grow Non-Red”, “Be the Leading Digital Retailer in NZ”, “Be a Leading Retail Financial Services Business” and “To Leverage the Group Competencies and Scale” has reshaped the group for the future.

Commenting on the results, Group CEO Mark Powell said, “The second half performance was particularly encouraging. After a period of significant catch up investment it was good to see strong profit leverage from continued sales growth. Also, with nearly $150 million annual online sales we are well placed to take a lead in the industry-wide digital revolution.”

Group Chair, Ted van Arkel, said, “The CEO succession process is on track and will allow a smooth handover. Meanwhile, the directors and management are focused on driving results through consistent sales growth, cost control and profit leverage.”

The directors are pleased to announce a final dividend of five cps, bringing total annual dividend to 16 cps. The dividend policy going forward will be 75-85 per cent of retail adjusted net profit after tax. The separation of financial services results from the dividend policy reflects its longer-term investment profile. The new finance company’s earnings will need to be reinvested over the next few years to grow its capital base.

Financial year 2016’s earnings will be significantly influenced by Christmas trading performance and the expected losses associated with the launch of the new financial services business. Therefore it is too early to provide specific earnings guidance for financial year 2016. However, the current business performance, coupled with key elements of the group’s strategic plan, should ensure that adjusted net profit after tax for the group in financial year 2016 is in line with that recorded in financial year 2015.

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