Broker's view: The Warehouse

GRANT DAVIES
Last updated 05:00 18/01/2014
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Company: The Warehouse Group

Sector: Retail

Overview: The big red shed has been doing its own bargain hunting of late, picking up the SchoolTex brand from stressed clothing retailer Postie Plus. This comes on the back of investments in online retailer Torpedo7 and the purchase of Noel Leeming and Bond & Bond in 2013. This growth by acquisition strategy has been complemented by a rebranding of the company's core brands, namely The Warehouse and Warehouse Stationary.

Pros: The acquisitions and rebranding are part of an attempt to reinvigorate The Warehouse brand and become New Zealand's leading multichannel retailer. Having now reported 11 consecutive quarters of comparable stores sales growth, the strategy appears to be paying off. The company sees this as just the beginning and have committed to approximately $430 million of capital expenditure over the next five years in order to see the strategy through. An increased focus on online sales is evidenced by their multitude of recent acquisitions and the use of retail search engine optimizer SLI Systems, all of which have helped to grow its online presence.

Cons: The foray into the online space, whilst positive, hints toward a lower margin future for the business. Bricks and mortar retailers are facing squeezed margins as consumers increasingly turn to, often cheaper, online alternatives. In the face of changing habits of consumers The Warehouse will have to be successful in their current strategy, which includes a long term goal of achieving 50 per cent of operating earnings from business units outside of the core Red Shed brand (Currently the "Red Sheds" account for over 75 per cent of Operating Earnings).

Price performance: The Warehouse Group was up 25 per cent in 2013, after a few years of subpar performance. The stock recently traded at $3.76.

Investment outlook: Much of the near term performance will come from the key December sales figures. Long term investors can expect solid dividends (gross 8 per cent) and some earnings growth

*A Broker's View is written by Grant Davies, NZX Associate Advisor, of Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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