Morningstar | The Warehouse Group Shows Signs of Life. FVE Unchanged at NZD 2.40
First-quarter sales growth at the Red Sheds, Blue Sheds, and Noel Leeming is tracking ahead of our full fiscal year 2019 estimate, and gross margin at the Red and Blue Sheds is improving. However, in anticipation of the crucial Christmas trading period, we maintain our near-term forecasts and our NZD 2.40 fair value estimate on no-moat-rated The Warehouse Group.Group headline sales were up by 3.6% in the first quarter, versus the previous corresponding period. This is ahead of our fiscal 2019 estimate of 1.7% and our forecast of 2.1% average revenue growth over the next five years. The result is promising, yet our more cautious full-year estimate stands as we expect competition to intensify over the Christmas trading period.
The losses in sales incurred at the core Red Sheds segment, from the switch to an everyday low price pricing model, appear to have been stemmed. For the first time in 18 months, the Red Sheds, accounting for 65% of the group’s operating profits in fiscal 2019, booked positive quarterly like-for-like sales growth. Headline sales grew by 2.0% compared with our full-year 0.7% forecast. Gross profit margins have increased slightly in the quarter and we expect them to improve by 30 basis points at the Red Sheds in fiscal 2019. We suspect operating margins have improved too, with like-for-like sales growth of 2.7% providing marginal operating leverage on top of the gross profit improvement.
The Blue Sheds’ quarterly headline sales growth of 4.4% was well ahead of our full-year estimate of 1.6%, and here too gross profit margins have ticked up. However, it cycled a weak corresponding trading period, disrupted by the integration of the Blue and Red Sheds systems.
Consumer electronics retailer Noel Leeming maintained its strong sales growth, although momentum slowed slightly after a stellar fiscal 2018. Headline sales increased 7.4%, down from 8.4% in the fourth quarter of fiscal 2018 and an average of 8.6% over the previous 12 months. We expect sales growth to continue moderating over the remainder of this year and we retain our 3.1% sales growth estimate.
The Warehouse Group is an office retailing group based in New Zealand. Co. is engaged in general retail in both the domestic small-office/home-office and small-to-medium size enterprise markets. Co. has two primary operating segments operating in the New Zealand retail sector. The operating segments are managed separately with their own management, stores and infrastructure. The Warehouse is predominantly a general merchandise and apparel retailer, with 87 stores located throughout New Zealand. The Warehouse Stationery is a stationery retailer, with 47 stores located throughout New Zealand.
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