Profit downgrade hits shares

LAURA WALTERS
Last updated 05:00 24/01/2014

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The Warehouse Group is grappling with a changing retail market with it warning its profits are forecast to fall for the half year.

It said yesterday strong Christmas trading will not be enough to avoid that for the half year to December 31, as tough competition squeezed margins.

The country's largest listed retailer expects to report an adjusted profit after tax of between $46 and $48 million, down from $52.9m in the same period in 2012.

Guidance for the full-year profit will be given at the half-year results release on March 7.

The company's share price fell 4.84 per cent on the news closing at $3.54 yesterday. The stock peaked at $4.39 high in May last year.

The Warehouse, which includes the red sheds, Noel Leeming, Warehouse Stationery and online retailer Torpedo 7, said strong Christmas trading was not enough to offset a margin squeeze felt across the red sheds in the first quarter of the financial year.

In November, the company said sales growth had not translated into improved gross profit.

The Warehouse chief executive, Mark Powell, said profits continued to be squeezed on the CD, DVD and books categories. Options were being considered about those categories.

Changes in the whiteware and television product ranges had also affected profits.

The company had continued to invest in its online businesses, with the aim of becoming the country's "leading multi-channel retailer", Powell said. "Online continues to be a significant game changer in the retail market."

Powell said he was pleased with how the company's retail brands traded during Christmas.

The trading profit, the profit delivered by the company's retail businesses, was likely to drop only 1 per cent to 2 per cent in the half, recovering much of the ground lost in the first quarter, Powell said. "This reflects the progress we are making as we reshape the group, in a retail market that is undergoing significant change."

The reshaping had required significant investment in the core red sheds business and in the acquisition of Noel Leeming and of multichannel businesses, resulting in higher funding costs and lower rental income, he said.

Yesterday the company said it expected the red sheds to increase same-store sales for the first half by 4 per cent, with total sales growth of 5 per cent.

Gross profit margins were expected to recover during the second quarter to match those during the same period the previous year. But that was not enough to offset the weak margins during the first quarter.

Grant Williamson, of sharebroking firm Hamilton Hindin Greene, said the profit downgrade was not a surprise, given the company's announcement before Christmas that margins were under pressure because of competition.

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However, some investors would have expected The Warehouse to recover the lost ground with a good Christmas trading period.

The Warehouse was showing encouraging signs for trading and acquisition activity. But it would not be an easy road for retailers who continued to struggle against "pretty subdued trading".

Expected interest rate rises this year would add to the headwinds for the sector, Williamson said.

"There are a lot of people out there with mortgages who will have less discretionary money for spending."

Some economists are picking the Reserve Bank will start raising interest rates from 2.5 per cent as early as next week, rather than holding off till March.

- Business

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