New Zealand Professional Investment Services Firm

Forsyth Barr

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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).

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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>
<p><strong>Noel Leading Strong Trading</strong></p>
<h3>RESEARCH&nbsp;INSIGHTS</h3>
<p>The Warehouse Group (WHS) released a strong trading update, albeit not overly surprising given recent retail sales data trends. Year to date, group sales are effectively flat on the prior year period, however, growth has been led by lower margin divisions, Noel&nbsp;Leeming&nbsp;and&nbsp;Torpedo7. In addition, online penetration has accelerated, with additional fulfilment costs also impacting margin. Whilst consumer activity has surprised to the positive to date, we retain a cautious view of the near term outlook.&nbsp;</p>
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<h3>Surging sales but weighted to lower margin divisions</h3>
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<p>Group sales for the year to date are effectively flat, following a surge in retail activity as New Zealand entered Alert Level 2. The key standouts are Noel Leeming and Torpedo7, with sales up +32% across both brands for the quarter to date, and +7% for the financial year to date. Whilst strong sales performance has reduced the level of discounting expected in the market, growth was led by low margin brands, weighing on group gross margin.</p>
<p>We suspect an element of the recent sales success represents a pull forward of demand, with sales performance concentrated in brands linked to favourable category trends; work from home, home entertainment, and sporting goods. However, should economic conditions worsen, we see scope for a pull towards value benefiting The Warehouse.</p>
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<h3>Online sales surged but higher cost to serve and product mix weigh on margin</h3>
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<p>Online penetration accelerated, particularly&nbsp;during Alert Level 3 where&nbsp;work from home requirements and home entertainment purchases saw a surge in demand at Noel&nbsp;Leeming. Year to date online sales represent&nbsp;11.8% of group sales (7.8% in FY19),&nbsp;although it has ticked lower since retail doors reopened (9.3% penetration in the last seven weeks).</p>
<p>Whilst the online channel provided a positive sales offset to bricks &amp; mortar disruption, high fulfilment costs, the accelerated nature of online adoption, and product mix weighed on margins.</p>
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<h3>Outlook uncertain but balance sheet in good condition</h3>
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<p>Beyond FY20&nbsp;the outlook for&nbsp;WHS&nbsp;and the retail sector remains highly uncertain.&nbsp;The company's recent consumer survey&nbsp;suggests a slowdown in consumer activity is likely,&nbsp;particularly as government wage subsidies roll off and the economic realities become clearer. Whilst we expect to see&nbsp;lower sales in FY21E, recent performance&nbsp;alleviates&nbsp;<wbr>concerns around discounting activity, and with NZ$330m of undrawn bank facilities, WHS's balance sheet is well placed to weather a level of further disruption.</p>
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<div><strong>Guy Hooper</strong></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>
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The Warehouse Group
Noel Leading Strong Trading
RESEARCH&nbsp;INSIGHTS
The Warehouse Group (WHS) released a strong trading update, albeit not overly surprising given recent retail sales data trends. Year to date, group sales are effectively flat on the prior year period, however, growth has been led by lower margin divisions, Noel&nbsp;Leeming&nbsp;and&nbsp;Torpedo7. In addition, online penetration has accelerated, with additional fulfilment costs also impacting margin. Whilst consumer activity has surprised to the positive to date, we retain a cautious view of the near term outlook.&nbsp;


Surging sales but weighted to lower margin divisions


Group sales for the year to date are effectively flat, following a surge in retail activity as New Zealand entered Alert Level 2. The key standouts are Noel Leeming and Torpedo7, with sales up +32% across both brands for the quarter to date, and +7% for the financial year to date. Whilst strong sales performance has reduced the level of discounting expected in the market, growth was led by low margin brands, weighing on group gross margin.
We suspect an element of the recent sales success represents a pull forward of demand, with sales performance concentrated in brands linked to favourable category trends; work from home, home entertainment, and sporting goods. However, should economic conditions worsen, we see scope for a pull towards value benefiting The Warehouse.


Online sales surged but higher cost to serve and product mix weigh on margin


Online penetration accelerated, particularly&nbsp;during Alert Level 3 where&nbsp;work from home requirements and home entertainment purchases saw a surge in demand at Noel&nbsp;Leeming. Year to date online sales represent&nbsp;11.8% of group sales (7.8% in FY19),&nbsp;although it has ticked lower since retail doors reopened (9.3% penetration in the last seven weeks).
Whilst the online channel provided a positive sales offset to bricks &amp; mortar disruption, high fulfilment costs, the accelerated nature of online adoption, and product mix weighed on margins.


Outlook uncertain but balance sheet in good condition


Beyond FY20&nbsp;the outlook for&nbsp;WHS&nbsp;and the retail sector remains highly uncertain.&nbsp;The company's recent consumer survey&nbsp;suggests a slowdown in consumer activity is likely,&nbsp;particularly as government wage subsidies roll off and the economic realities become clearer. Whilst we expect to see&nbsp;lower sales in FY21E, recent performance&nbsp;alleviates&nbsp;concerns around discounting activity, and with NZ$330m of undrawn bank facilities, WHS's balance sheet is well placed to weather a level of further disruption.




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




The Warehouse Group: Noel Leading Strong Trading