Morningstar | The Warehouse Group to Start Reaping Benefits From Its Transformation Efforts in Fiscal 2019
No-moat-rated The Warehouse Group is set to continue its transformation for another two years with investments in its online channel, both in digital and fulfilment, as well as refurbishing its existing physical store network. We now expect fiscal 2019 capital expenditures to increase by some 30% to NZD 90 million, with additional one-off operating expenses of NZD 25 million. These higher near-term expenses are offset by the positive impact of the time value of money, and our fair value estimate remains at NZD 2.40.In fiscal 2019, we still expect improving performance in sales and EBIT margins in the core Red Sheds segment--contributing some 60% to group sales--following the first year of the group’s transformation journey and the painful switch to an everyday-low-price strategy from hi-lo pricing, previously. Together with continued strength from the group’s second largest brand, Noel Leeming, we estimate the new range and pricing to drive top line sales growth of 1.7% and a 10-basis-point increase in underlying EBIT margins in fiscal 2019. We expect incremental improvements to underpin a recovery in the group’s EBIT margins to 3.8% by fiscal 2023, yet still far more pessimistic than the group’s unchanged long-term target of 7% operating margins. For instance, management expects the investment made in the new warehouse management system to result in annual cost savings of NZD 5.4 million from fiscal 2020, which we estimate boosts EBIT margins by 17 basis points alone.
Our positive outlook is shared with the company’s board. A 100% imputed full-year dividend of NZD 0.16 was declared, representing a 94% payout ratio and reflecting the board’s confidence in the transformation strategy and the improved balance sheet. At year-end fiscal 2018, gearing was 25%, down from 31% in the previous year, and at the lower end of the 20%-40% target range.
Management expects underlying profitability of the business to modestly increase, despite headwinds such as labour and fuel inflation weighing on the cost of doing business. We forecast underlying net profit after tax to increase by 4% to NZD 61 million in fiscal 2019 from the NZD 59 million in fiscal 2018. We expect management to provide guidance after the second quarter, which includes Christmas trading.
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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