New Zealand Professional Investment Services Firm

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<br>Shepherd's Delight</h2>
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<h2>RESEARCH&nbsp;INSIGHTS</h2>
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<p>The Warehouse (WHS) has delivered an early Christmas present highlighting both strong sales performance and margin expansion year to date. A buoyant consumer backdrop and exposure to retail categories&nbsp;benefitting&nbsp;from nesting and athletic trends are likely to support continued momentum into the key Christmas sales period. WHS has issued 1H21 guidance of underlying NPAT in excess of NZ$70m (Forsyth&nbsp;Barr NZ$73m). In addition, WHS has signalled plans to&nbsp;repay the government wage subsidy (NZ$68m) following recent earnings strength.</p>
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<h3>What's changed?</h3>
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<li><strong>Earnings:</strong>&nbsp;We materially lift our underlying FY21E NPAT forecast, up +32% to NZ$92m (FY21E reported profit forecast falls as a result of wage subsidy repayment). We make small positive changes to our sales assumptions but lift gross margin expectations, driving an increase of +14% and +4% to FY22E and FY23E NPAT respectively.</li>
<li><strong>Dividend:</strong>&nbsp;We lift our FY21E dividend assumption +40% to 14cps, reflecting the underlying earnings strength and net cash position. We also lift FY22E and FY23E dividend assumptions in line with earnings changes. WHS offers an attractive 6.1% 12 month forward cash dividend yield.&nbsp;</li>
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<h3>Sales accelerate into Christmas sales period</h3>
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<p>Sales momentum accelerated through November and December, with group sales up +6.6% year to date, ahead of the 1Q21 run rate (+6.3%). We suspect Noel Leeming is the standout performer, benefitting from increased nesting spend and a buoyant consumer backdrop. Whilst supply chain congestion remains a theme, WHS has indicated it expects to have sufficient inventory in place through the peak Christmas sales period, with some scope for shortages of winter product in 4Q21.</p>
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<h3>Gross margin expansion</h3>
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<p>WHS has maintained higher gross margins through recent weeks, with the company expecting 1H21E gross margin will be c. 170bp ahead of the prior period (1H20 33.6%). We suspect the supportive retail backdrop is contributing to lower sector discounting activity, particularly for Red and Blue Sheds.</p>
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<h3>Half year guidance provided</h3>
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<p>WHS has guided to 1H21 NPAT in excess of NZ$70m, pre-repayment of the government wage subsidy (NZ$68m), implying underlying growth of at least +52% on the prior year period (1H20 NPAT NZ$46.2m). With strong earnings and a smaller inventory balance, WHS expect to report a 1H21 net cash balance ahead of FY20 (NZ$168m). FY21 guidance is expected at the interim result announcement, with our base case currently assuming underlying sales momentum slows into 2H21E, turning negative in 4Q21E as the company cycles an abnormal 4Q20.</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 Shepherd's Delight


RESEARCH&nbsp;INSIGHTS

The Warehouse (WHS) has delivered an early Christmas present highlighting both strong sales performance and margin expansion year to date. A buoyant consumer backdrop and exposure to retail categories&nbsp;benefitting&nbsp;from nesting and athletic trends are likely to support continued momentum into the key Christmas sales period. WHS has issued 1H21 guidance of underlying NPAT in excess of NZ$70m (Forsyth&nbsp;Barr NZ$73m). In addition, WHS has signalled plans to&nbsp;repay the government wage subsidy (NZ$68m) following recent earnings strength.


What's changed?



Earnings:&nbsp;We materially lift our underlying FY21E NPAT forecast, up +32% to NZ$92m (FY21E reported profit forecast falls as a result of wage subsidy repayment). We make small positive changes to our sales assumptions but lift gross margin expectations, driving an increase of +14% and +4% to FY22E and FY23E NPAT respectively.
Dividend:&nbsp;We lift our FY21E dividend assumption +40% to 14cps, reflecting the underlying earnings strength and net cash position. We also lift FY22E and FY23E dividend assumptions in line with earnings changes. WHS offers an attractive 6.1% 12 month forward cash dividend yield.&nbsp;



Sales accelerate into Christmas sales period


Sales momentum accelerated through November and December, with group sales up +6.6% year to date, ahead of the 1Q21 run rate (+6.3%). We suspect Noel Leeming is the standout performer, benefitting from increased nesting spend and a buoyant consumer backdrop. Whilst supply chain congestion remains a theme, WHS has indicated it expects to have sufficient inventory in place through the peak Christmas sales period, with some scope for shortages of winter product in 4Q21.


Gross margin expansion


WHS has maintained higher gross margins through recent weeks, with the company expecting 1H21E gross margin will be c. 170bp ahead of the prior period (1H20 33.6%). We suspect the supportive retail backdrop is contributing to lower sector discounting activity, particularly for Red and Blue Sheds.


Half year guidance provided


WHS has guided to 1H21 NPAT in excess of NZ$70m, pre-repayment of the government wage subsidy (NZ$68m), implying underlying growth of at least +52% on the prior year period (1H20 NPAT NZ$46.2m). With strong earnings and a smaller inventory balance, WHS expect to report a 1H21 net cash balance ahead of FY20 (NZ$168m). FY21 guidance is expected at the interim result announcement, with our base case currently assuming underlying sales momentum slows into 2H21E, turning negative in 4Q21E as the company cycles an abnormal 4Q20.




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




Warehouse Group Limited

The Warehouse Group: Shepherd's Delight