New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

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Equity Bottom-Up

Warehouse Group Limited / Equity Bottom-Up

<h2>The Warehouse Group</h2>
FY19 — Points on the Board
The Warehouse (WHS) reported an encouraging FY19 result, lifting earnings across Red Sheds, Blue Sheds, and Noel Lemming, exhibiting operating improvements from its transformation programme. Going forward we expect Group store EBIT margin to continue to improve, offsetting macro and cost headwinds. However, customer acquisition costs relating to its new online platform, TheMarket, will likely provide an earnings drag for a number of years.
What’s changed?
<ul>
<li>Earnings:&nbsp;We have lowered our FY20E/FY21E/FY22E Normalised NPAT -4%/-7%/-6% as a result of higher expected operating losses from TheMarket</li>
</ul>
Transformation programme unlocking margin gains
WHS reported FY19 underlying NPAT of NZ$74.1m, up +26% on the prior period and in line with expectations. Margin improvements across Red Sheds, Blue Sheds, and Noel Lemming are encouraging and exhibit signs of execution on the company’s transformation programme. Torpedo7 delivered a higher than expected operating loss as a result of deterioration in its cost of doing business margin, with ongoing store expansion. Additionally, costs associated with the development of TheMarket of -NZ$6.0m also weighed on earnings. Group online sales displayed strong growth, up +18%, and now represent 7.8% of total sales.
Debt reduction enabled by improved supplier terms; capex lift guided
WHS reported a material reduction in net debt, driven by a release of working capital following the negotiation of improved supplier terms, which we view as sustainable and more aligned to retailing peers. Inventory levels also fell, with a reduction in stock keeping units following the shift to an everyday low pricing model. Gearing fell to 14% from 25% in the prior period. WHS guided to elevated capex through FY20–FY22 (NZ$100m to NZ$120m per year) as it invests in its store network, information and digital systems, and logistics.
Transformation gains to offset macro headwinds
WHS has not provided FY20 guidance at this stage given the importance of the peak Christmas trading period; however, it highlighted a number of macro headwinds in unfavourable currency movements and ongoing cost inflation. We expect improvements in the underlying business will continue, offsetting headwinds and providing earnings growth. WHS signalled an FY20 operating loss from its recently launched ecommerce platform, TheMarket, of NZ$14m to NZ$17m. We expect TheMarket could take circa five years to reach breakeven although expect FY20 to represent the peak of negative earnings with a focus on both customer and merchant acquisition as it builds out its offering.&nbsp;
<div class="content-highlight">
Investment View
WHS operates The Warehouse, Warehouse Stationery, Noel Leeming, Torpedo7, and TheMarket. Material business transformation is underway which brings considerable moving parts and a wide range of outcomes. This follows underwhelming returns in recent years. We retain a cautious stance with material risk at this stage of the transformation around execution, ‘cost-in’, and time to see results; but there are some initial encouraging signs.&nbsp;
</div>
Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

The Warehouse Group
FY19 — Points on the Board
The Warehouse (WHS) reported an encouraging FY19 result, lifting earnings across Red Sheds, Blue Sheds, and Noel Lemming, exhibiting operating improvements from its transformation programme. Going forward we expect Group store EBIT margin to continue to improve, offsetting macro and cost headwinds. However, customer acquisition costs relating to its new online platform, TheMarket, will likely provide an earnings drag for a number of years.
What’s changed?

Earnings:&nbsp;We have lowered our FY20E/FY21E/FY22E Normalised NPAT -4%/-7%/-6% as a result of higher expected operating losses from TheMarket

Transformation programme unlocking margin gains
WHS reported FY19 underlying NPAT of NZ$74.1m, up +26% on the prior period and in line with expectations. Margin improvements across Red Sheds, Blue Sheds, and Noel Lemming are encouraging and exhibit signs of execution on the company’s transformation programme. Torpedo7 delivered a higher than expected operating loss as a result of deterioration in its cost of doing business margin, with ongoing store expansion. Additionally, costs associated with the development of TheMarket of -NZ$6.0m also weighed on earnings. Group online sales displayed strong growth, up +18%, and now represent 7.8% of total sales.
Debt reduction enabled by improved supplier terms; capex lift guided
WHS reported a material reduction in net debt, driven by a release of working capital following the negotiation of improved supplier terms, which we view as sustainable and more aligned to retailing peers. Inventory levels also fell, with a reduction in stock keeping units following the shift to an everyday low pricing model. Gearing fell to 14% from 25% in the prior period. WHS guided to elevated capex through FY20–FY22 (NZ$100m to NZ$120m per year) as it invests in its store network, information and digital systems, and logistics.
Transformation gains to offset macro headwinds
WHS has not provided FY20 guidance at this stage given the importance of the peak Christmas trading period; however, it highlighted a number of macro headwinds in unfavourable currency movements and ongoing cost inflation. We expect improvements in the underlying business will continue, offsetting headwinds and providing earnings growth. WHS signalled an FY20 operating loss from its recently launched ecommerce platform, TheMarket, of NZ$14m to NZ$17m. We expect TheMarket could take circa five years to reach breakeven although expect FY20 to represent the peak of negative earnings with a focus on both customer and merchant acquisition as it builds out its offering.&nbsp;

Investment View
WHS operates The Warehouse, Warehouse Stationery, Noel Leeming, Torpedo7, and TheMarket. Material business transformation is underway which brings considerable moving parts and a wide range of outcomes. This follows underwhelming returns in recent years. We retain a cautious stance with material risk at this stage of the transformation around execution, ‘cost-in’, and time to see results; but there are some initial encouraging signs.&nbsp;

Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

The Warehouse Group: FY19 — Points on the Board

<h2>The Warehouse Group</h2>
What’s in Store
The Warehouse Group (WHS) provided updated FY19 earnings guidance implying a ~+7% upgrade on the prior range, as a result of incentive payments that did not accrue. WHS has pre-released its FY19 result — with improved underlying trading pleasing, following a period of considerable strategic change. We look for 1) divisional detail, 2) outlook insight, and 3) targets for its online platform TheMarket when WHS reports on 25 September.
What’s changed?
<ul>
<li>Earnings:&nbsp;Revised FY19 normalised profit +8% to NZ$74m, the midpoint of updated guidance range</li>
</ul>
Earnings upgrade
WHS provided updated FY19 normalised profit guidance of NZ$73m to NZ$75m, ~+$4.5m ahead of the prior guidance range of NZ$67m to NZ$70m. We have accordingly upgraded our FY19 normalised NPAT forecast +8% to NZ$74m. The uplift is not a result of a change to underlying trading but instead removing the impact of incentive payments that did not fully accrue during the period.
Key issues to consider at WHS’ FY19 result
WHS is due to report FY19 earnings on 25 September. Key issues to look for in the result:
<ul>
<li>Transformation progression —&nbsp;WHS is in the midst of a business transformation. Recent operating upgrades suggest initial execution. We look for divisional detail and outlook commentary.</li>
<li>Balance sheet —&nbsp;WHS previously indicated it expects net debt to be in the range of NZ$60m to NZ$80m, a material reduction on the prior period (FY18 NZ$162m), driven by a release of working capital. We understand the release relates to a change in the terms of trade with international suppliers.</li>
<li>TheMarket&nbsp;—&nbsp;WHS recently launched its online platform, TheMarket, in August. We estimate FY19 capex relating to the platform to be ~NZ$8m. Key questions for management include estimated breakeven timeframe, near-term earnings drag, and continued investment requirements.</li>
</ul>
&nbsp;Figure 1. FY19 result expectations
<table class="table table-striped">
<thead>
<tr>
<td></td>
<td>
FY18
</td>
<td>
FY19E
</td>
<td>
% chg
</td>
<td>
Consensus
</td>
</tr>
</thead>
<tbody>
<tr>
<td>
Revenue
</td>
<td>
2,995
</td>
<td>
3,049
</td>
<td>
2%
</td>
<td>
3,066
</td>
</tr>
<tr>
<td>
EBITDA
</td>
<td>
151
</td>
<td>
166
</td>
<td>
10%
</td>
<td>
164
</td>
</tr>
<tr>
<td>
Underlying profit
</td>
<td>
59
</td>
<td>
74
</td>
<td>
25%
</td>
<td>
66
</td>
</tr>
<tr>
<td>
Underlying EPS (cps)
</td>
<td>
17
</td>
<td>
21
</td>
<td>
25%
</td>
<td>
19
</td>
</tr>
<tr>
<td>
Dividend (cps)
</td>
<td>
16
</td>
<td>
16
</td>
<td>
0%
</td>
<td>
15
</td>
</tr>
</tbody>
</table>
Source: Bloomberg, Forsyth Barr analysis&nbsp;
<div class="content-highlight">
Investment View
WHS operates The Warehouse, Warehouse Stationery, Noel Leeming and Torpedo7. Material business transformation is underway which brings considerable moving parts and a wide range of outcomes. This follows underwhelming returns in recent years. We retain a cautious stance with material risk at this stage of the transformation around execution, ‘cost-in’, and time to see results; but there are some initial encouraging signs.
</div>
&nbsp;Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

The Warehouse Group
What’s in Store
The Warehouse Group (WHS) provided updated FY19 earnings guidance implying a ~+7% upgrade on the prior range, as a result of incentive payments that did not accrue. WHS has pre-released its FY19 result — with improved underlying trading pleasing, following a period of considerable strategic change. We look for 1) divisional detail, 2) outlook insight, and 3) targets for its online platform TheMarket when WHS reports on 25 September.
What’s changed?

Earnings:&nbsp;Revised FY19 normalised profit +8% to NZ$74m, the midpoint of updated guidance range

Earnings upgrade
WHS provided updated FY19 normalised profit guidance of NZ$73m to NZ$75m, ~+$4.5m ahead of the prior guidance range of NZ$67m to NZ$70m. We have accordingly upgraded our FY19 normalised NPAT forecast +8% to NZ$74m. The uplift is not a result of a change to underlying trading but instead removing the impact of incentive payments that did not fully accrue during the period.
Key issues to consider at WHS’ FY19 result
WHS is due to report FY19 earnings on 25 September. Key issues to look for in the result:

Transformation progression —&nbsp;WHS is in the midst of a business transformation. Recent operating upgrades suggest initial execution. We look for divisional detail and outlook commentary.
Balance sheet —&nbsp;WHS previously indicated it expects net debt to be in the range of NZ$60m to NZ$80m, a material reduction on the prior period (FY18 NZ$162m), driven by a release of working capital. We understand the release relates to a change in the terms of trade with international suppliers.
TheMarket&nbsp;—&nbsp;WHS recently launched its online platform, TheMarket, in August. We estimate FY19 capex relating to the platform to be ~NZ$8m. Key questions for management include estimated breakeven timeframe, near-term earnings drag, and continued investment requirements.

&nbsp;Figure 1. FY19 result expectations





FY18


FY19E


% chg


Consensus






Revenue


2,995


3,049


2%


3,066




EBITDA


151


166


10%


164




Underlying profit


59


74


25%


66




Underlying EPS (cps)


17


21


25%


19




Dividend (cps)


16


16


0%


15




Source: Bloomberg, Forsyth Barr analysis&nbsp;

Investment View
WHS operates The Warehouse, Warehouse Stationery, Noel Leeming and Torpedo7. Material business transformation is underway which brings considerable moving parts and a wide range of outcomes. This follows underwhelming returns in recent years. We retain a cautious stance with material risk at this stage of the transformation around execution, ‘cost-in’, and time to see results; but there are some initial encouraging signs.

&nbsp;Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

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Warehouse Group Limited (WHS NZ)

The Warehouse Group: FY19 — Points on the Board

The Warehouse Group FY19 — Points on the Board The Warehouse (WHS) reported an encouraging FY19 result, lifting earnings across Red Sheds, Blue...

Forsyth Barr

The Warehouse Group: What’s in Store

The Warehouse Group What’s in Store The Warehouse Group (WHS) provided updated FY19 earnings guidance implying a ~+7% upgrade on the prior range,...

Forsyth Barr

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