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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<br>The Guidance that Stole Christmas</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>The Warehouse Group's (WHS) trading update for the five months ended 2 January 2022, highlights positive sales momentum through the Christmas period but increasing costs of doing business. The company provided Adjusted Net Profit After Tax (NPAT) guidance for 1H22, which is expected to exceed NZ$40m, hampered by ~NZ$35m of non COVID-19 cost increases over the prior period. Total group sales for the first five months of trading (NZ$1.47bn) are now ~-6% down on FY21, an improvement on the ~-15% reported after a COVID-19 impacted first quarter. WHS expects second quarter trading to remain at or above last year's levels and believes it is well positioned for the remainder of the summer and Back to School period. WHS is scheduled to report its half year results on 22 March 2022. We make material changes to our earnings estimates to incorporate higher costs and reduce our target price to NZ$3.85 (from NZ$4.35). ​​​​​Trading at ~12x one-year forward PE we retain an OUTPERFORM rating but recognise near-term risks with inflationary pressures and the potential impact of the COVID-19 Omicron variant in New Zealand.</p>
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<h3>What's changed?</h3>
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<ul>
<li><strong>Target price</strong>:&nbsp;reduced to NZ$3.85&nbsp;(from NZ$4.35)</li>
<li><strong>Earnings estimates</strong>: FY22/FY23/FY24 Adjusted Net Profit After Tax estimates reduced by -28%/-14%/-12%</li>
</ul>
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<h3>Cost of doing business rising</h3>
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<p>Based on the results from the first five&nbsp;months of 1H22, WHS expects 1H22 Adjusted Net Profit After Tax (NPAT) to exceed NZ$40m, (compared to 1H21 Adjusted NPAT of NZ$111m and NZ$46m in 1H20). The company highlighted three main contributors to the decrease in expected 1H22&nbsp;NPAT compared to the prior period:</p>
<ol>
<li>Sales are expected to be ~-NZ$80m (~-4%) less than 1H21 due to COVID-19 restrictions in 1Q21.</li>
<li>Cost of doing business is NZ$35m higher&nbsp;attributed to higher store labour costs, increased investment in&nbsp;TheMarket, higher digital spend, in addition to an estimated&nbsp; NZ$10m–NZ$12m of COVID-19 related costs.&nbsp;</li>
<li>Gross profit margin in 1H21&nbsp;benefitted&nbsp;from an NZ$10m decrease in inventory provisioning&nbsp;from FY20&nbsp;and reduced discounting.</li>
</ol>
</div>
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<h3>Online sales increasing but weighing on gross profit margin</h3>
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<div id="m_1125587070672581244i8j25">
<p>WHS has continued to experience higher online sales levels, growing +105% on FY21 and representing 18% of total sales. The increase in online purchases contributed to a reduction in gross profit margins (down -55bps&nbsp;on the prior year) with higher costs associated with freight and online sales lower-margin product mix. That said, gross profit margin was +132bps ahead of the same period of FY20. Click and collect represented 50% of online sales, an&nbsp;increase of +89% on the prior year.&nbsp;</p>
</div>

The Warehouse Group The Guidance that Stole Christmas

OUTPERFORM
The Warehouse Group's (WHS) trading update for the five months ended 2 January 2022, highlights positive sales momentum through the Christmas period but increasing costs of doing business. The company provided Adjusted Net Profit After Tax (NPAT) guidance for 1H22, which is expected to exceed NZ$40m, hampered by ~NZ$35m of non COVID-19 cost increases over the prior period. Total group sales for the first five months of trading (NZ$1.47bn) are now ~-6% down on FY21, an improvement on the ~-15% reported after a COVID-19 impacted first quarter. WHS expects second quarter trading to remain at or above last year's levels and believes it is well positioned for the remainder of the summer and Back to School period. WHS is scheduled to report its half year results on 22 March 2022. We make material changes to our earnings estimates to incorporate higher costs and reduce our target price to NZ$3.85 (from NZ$4.35). ​​​​​Trading at ~12x one-year forward PE we retain an OUTPERFORM rating but recognise near-term risks with inflationary pressures and the potential impact of the COVID-19 Omicron variant in New Zealand.


What's changed?



Target price:&nbsp;reduced to NZ$3.85&nbsp;(from NZ$4.35)
Earnings estimates: FY22/FY23/FY24 Adjusted Net Profit After Tax estimates reduced by -28%/-14%/-12%



Cost of doing business rising


Based on the results from the first five&nbsp;months of 1H22, WHS expects 1H22 Adjusted Net Profit After Tax (NPAT) to exceed NZ$40m, (compared to 1H21 Adjusted NPAT of NZ$111m and NZ$46m in 1H20). The company highlighted three main contributors to the decrease in expected 1H22&nbsp;NPAT compared to the prior period:

Sales are expected to be ~-NZ$80m (~-4%) less than 1H21 due to COVID-19 restrictions in 1Q21.
Cost of doing business is NZ$35m higher&nbsp;attributed to higher store labour costs, increased investment in&nbsp;TheMarket, higher digital spend, in addition to an estimated&nbsp; NZ$10m–NZ$12m of COVID-19 related costs.&nbsp;
Gross profit margin in 1H21&nbsp;benefitted&nbsp;from an NZ$10m decrease in inventory provisioning&nbsp;from FY20&nbsp;and reduced discounting.



Online sales increasing but weighing on gross profit margin


WHS has continued to experience higher online sales levels, growing +105% on FY21 and representing 18% of total sales. The increase in online purchases contributed to a reduction in gross profit margins (down -55bps&nbsp;on the prior year) with higher costs associated with freight and online sales lower-margin product mix. That said, gross profit margin was +132bps ahead of the same period of FY20. Click and collect represented 50% of online sales, an&nbsp;increase of +89% on the prior year.&nbsp;


The Warehouse Group: The Guidance that Stole Christmas