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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Warehouse Group Limited / Equity Bottom-Up

<h2>The Warehouse Group</h2>
1Q20 Sales Check Out
The Warehouse Group (WHS) has started FY20 well, illustrating signs of execution on its transformation programme, reporting 1Q20 sales growth of +4.0% on the prior period. Growth was broad based and ahead of expectations across three of the four key brands. We see some upside risks to our forecasts with 1Q20 sales growth ahead of our full year run rate; however, note that the important Christmas selling season is to come. FY20 guidance is expected to be provided at the end of 2Q20.
Solid start to the year
WHS reported 1Q20 group revenue of NZ$695m, up +4.0% on the prior comparable period and ahead of our FY20 run rate. Margin commentary is also positive, particularly against the backdrop of risin<a target="_blank"></a>g cost pressures with gross margins in Red Sheds performing well relative to the prior year. Whilst the strong start is positive, 1Q represents ~20% of full year revenue with the key Christmas quarter to come.
Divisional insights
<ul>
<li>Red Sheds: An encouraging start with 1Q20 same store sales (SSS) up +3.1%, ahead of expectations, and positive commentary around gross margin expansion. Margin improvement is being driven by a mixture of better price realisation and buying discipline. On a category basis, general merchandise is the main driver of growth.</li>
<li>Blue Sheds: 1Q20 sales increased +2.1% on the prior year period. Relatively benign SSS growth of +0.6% is suppressed by a number of store-within-a-store conversions (Blue Shed integrated into a Red Shed) which are considered new stores. Warehouse Stationary stores that have been integrated into a Red Shed are seeing strong sales growth, leveraging Red Sheds higher foot traffic, and at better margins.</li>
<li>Noel Leeming: A key standout for the quarter with sales benefitting from the timing of the Rugby World Cup and a new Apple product launch. SSS increased +6.1%, with particularly strong growth in the TV and Computer Accessories categories as consumers bought streaming technology ahead of the Rugby World Cup.</li>
<li>Torpedo7: Slight decline in SSS, down -0.6%, with total sales benefitting from additional store openings (up +3.0%). We suspect continued store expansion combined with limited SSS growth is likely to be weighing on margins.</li>
<li>TheMarket: Early signs for TheMarket are encouraging with customer traffic ~+30% ahead of expectations and continued growth in brands available through the platform. However, build out of ecommerce platforms can take a long time and we expect customer acquisition costs will be an earnings drag for a number of years.&nbsp;</li>
</ul>
<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>
<a target="_blank"></a><a target="_blank">Guy Hooper</a>
<a target="_blank">guy.hooper@forsythbarr.co.nz</a>
<a target="_blank">+64 4 495 5255</a>

The Warehouse Group
1Q20 Sales Check Out
The Warehouse Group (WHS) has started FY20 well, illustrating signs of execution on its transformation programme, reporting 1Q20 sales growth of +4.0% on the prior period. Growth was broad based and ahead of expectations across three of the four key brands. We see some upside risks to our forecasts with 1Q20 sales growth ahead of our full year run rate; however, note that the important Christmas selling season is to come. FY20 guidance is expected to be provided at the end of 2Q20.
Solid start to the year
WHS reported 1Q20 group revenue of NZ$695m, up +4.0% on the prior comparable period and ahead of our FY20 run rate. Margin commentary is also positive, particularly against the backdrop of rising cost pressures with gross margins in Red Sheds performing well relative to the prior year. Whilst the strong start is positive, 1Q represents ~20% of full year revenue with the key Christmas quarter to come.
Divisional insights

Red Sheds: An encouraging start with 1Q20 same store sales (SSS) up +3.1%, ahead of expectations, and positive commentary around gross margin expansion. Margin improvement is being driven by a mixture of better price realisation and buying discipline. On a category basis, general merchandise is the main driver of growth.
Blue Sheds: 1Q20 sales increased +2.1% on the prior year period. Relatively benign SSS growth of +0.6% is suppressed by a number of store-within-a-store conversions (Blue Shed integrated into a Red Shed) which are considered new stores. Warehouse Stationary stores that have been integrated into a Red Shed are seeing strong sales growth, leveraging Red Sheds higher foot traffic, and at better margins.
Noel Leeming: A key standout for the quarter with sales benefitting from the timing of the Rugby World Cup and a new Apple product launch. SSS increased +6.1%, with particularly strong growth in the TV and Computer Accessories categories as consumers bought streaming technology ahead of the Rugby World Cup.
Torpedo7: Slight decline in SSS, down -0.6%, with total sales benefitting from additional store openings (up +3.0%). We suspect continued store expansion combined with limited SSS growth is likely to be weighing on margins.
TheMarket: Early signs for TheMarket are encouraging with customer traffic ~+30% ahead of expectations and continued growth in brands available through the platform. However, build out of ecommerce platforms can take a long time and we expect customer acquisition costs will be an earnings drag for a number of years.&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: 1Q20 Sales Check Out