New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Warehouse Group Limited / Equity Bottom-Up

<h2>The Warehouse Group</h2>
<p><strong>3Q20 Sales Checkout</strong></p>
<p><strong>RESEARCH&nbsp;INSIGHTS</strong></p>
<p>The Warehouse Group (WHS) benefited from a surge in demand prior to the move to Alert Level 4, partially offsetting the sales hole as store doors were temporarily closed. The outlook for WHS and the retail sector remains opaque, with the full extent of the impact of lockdown policies unclear, and consumer appetite for bricks &amp; mortar shopping through lower Alert Levels uncertain. In addition, the deteriorating economic outlook may weigh on medium-term growth.</p>
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<p><strong>3Q20 — A burst of activity before&nbsp;lockdown</strong></p>
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<p>WHS experienced a strong ramp in sales ahead of COVID-19 Alert Level 4, with group sales for the period to 25 March surging +19% against the prior year period. Panic buying in grocery and a lift in technology spend as consumers positioned to work from home drove the strong result. However, sales fell away as the country entered lockdown, with WHS announcing 3Q20 sales of NZ$586.3m, down -18% on the prior year period. Red Sheds and Torpedo7 experienced the biggest drop in quarterly sales, down -23% and -18% on the prior year respectively, with Noel Leeming and Blue Sheds down -11% and -10% respectively.</p>
<p>Although online penetration has increased materially, it is not a significant offset to door closures, representing 16% of suppressed 3Q20 sales (versus 8% of total sales in 1H20).</p>
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<p><strong>Reduced cost base lowers earnings impact</strong></p>
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<p>​​​​​​​WHS has significantly reduced its fixed cost base through Government wage subsidies (group wage subsidy of NZ$67m), temporary salary reductions, and possible rent relief from landlords. However, these are temporary reductions which are likely to roll off through 4Q20. We, therefore, expect the negative earnings impact from COVID-19 to be larger in FY21E.</p>
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<p><strong>A tough outlook</strong></p>
<div id="m_1130586538908866886iywcz">
<p>We have made significant negative revisions to our earnings forecasts to reflect store closures and reduced trading capacity through lower Alert Levels.</p>
<p>When New&nbsp;Zealand&nbsp;shifts to Alert Level 2, and store doors re-open,&nbsp;we expect elevated discounting across the retail sector as companies look to clear higher than usual stock levels. This is likely to weigh on gross margin in FY20E and FY21E, with further pressure from FX headwinds in FY21E as hedging&nbsp;rolls off.</p>
<p>Post COVID-19, and once the economic implications of New Zealand's lockdown measures become apparent, we expect the weaker economic backdrop to weigh on sales recovery. Through the Global Financial Crisis (GFC), both Red Sheds and Blue Sheds delivered negative same store sales growth (SSS).</p>
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<div>Guy Hooper</div>
<div><a href="mailto:guy.hooper@forsythbarr.co.nz" target="_blank" rel="noopener">guy.hooper@forsythbarr.co.nz</a></div>
<div>+64 4 495 5255</div>
</div>
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The Warehouse Group
3Q20 Sales Checkout
RESEARCH&nbsp;INSIGHTS
The Warehouse Group (WHS) benefited from a surge in demand prior to the move to Alert Level 4, partially offsetting the sales hole as store doors were temporarily closed. The outlook for WHS and the retail sector remains opaque, with the full extent of the impact of lockdown policies unclear, and consumer appetite for bricks &amp; mortar shopping through lower Alert Levels uncertain. In addition, the deteriorating economic outlook may weigh on medium-term growth.

3Q20 — A burst of activity before&nbsp;lockdown

WHS experienced a strong ramp in sales ahead of COVID-19 Alert Level 4, with group sales for the period to 25 March surging +19% against the prior year period. Panic buying in grocery and a lift in technology spend as consumers positioned to work from home drove the strong result. However, sales fell away as the country entered lockdown, with WHS announcing 3Q20 sales of NZ$586.3m, down -18% on the prior year period. Red Sheds and Torpedo7 experienced the biggest drop in quarterly sales, down -23% and -18% on the prior year respectively, with Noel Leeming and Blue Sheds down -11% and -10% respectively.
Although online penetration has increased materially, it is not a significant offset to door closures, representing 16% of suppressed 3Q20 sales (versus 8% of total sales in 1H20).

Reduced cost base lowers earnings impact

​​​​​​​WHS has significantly reduced its fixed cost base through Government wage subsidies (group wage subsidy of NZ$67m), temporary salary reductions, and possible rent relief from landlords. However, these are temporary reductions which are likely to roll off through 4Q20. We, therefore, expect the negative earnings impact from COVID-19 to be larger in FY21E.

A tough outlook

We have made significant negative revisions to our earnings forecasts to reflect store closures and reduced trading capacity through lower Alert Levels.
When New&nbsp;Zealand&nbsp;shifts to Alert Level 2, and store doors re-open,&nbsp;we expect elevated discounting across the retail sector as companies look to clear higher than usual stock levels. This is likely to weigh on gross margin in FY20E and FY21E, with further pressure from FX headwinds in FY21E as hedging&nbsp;rolls off.
Post COVID-19, and once the economic implications of New Zealand's lockdown measures become apparent, we expect the weaker economic backdrop to weigh on sales recovery. Through the Global Financial Crisis (GFC), both Red Sheds and Blue Sheds delivered negative same store sales growth (SSS).




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




Warehouse Group Limited

The Warehouse Group: 3Q20 Sales Checkout