The Warehouse Group Ltd said yesterday “encouraging” Christmas trading confirmed its “improving trajectory”.
The first comparison, for the retail group’s main outlets, the Red Sheds, indicated a trajectory that’s negative, but over Christmas was less bad.
The second comparison, for the company’s first half (to the end of January), shows a steep decline in returns – down 22-28%, largely resulting from “a significant accrual for a redesigned incentive programme”.
The word “significant” has no place in a statement like this because it signifies nothing. It commonly amounts to “big effort which should be praised”, but in reality should be read as “Big deal! Tell me when you’ve got something solid to say.” The Warehouse has made no attempt here to quantify the cost of hiring new staff & importing foreign executive expertise.
The company talked a year ago about reorganising, and has since focused on “transformation”.
In yesterday’s announcement, when I got to “strong sell-through of seasonal lines” I knew gobbledegook was going to win over a straightforward tally of performance. The quoted phrase’s context: “Year on Year unit sales show an increase of 5.1% with transactions rising 2.9% in conjunction with strong sell-through of seasonal lines.”
I figure statements like that, which have made it through the chief executive to the board, are indeed a strong indication that transformation is needed, but not quite the one they’re talking about.
The strong sell-through was followed by this comment from group chief executive Nick Grayston: “As expected the move from Hi-Lo to Every Day Low Price (EDLP) in the Warehouse ‘Red Sheds’ coupled with a one-time reduction in ranges and consequent clearance activity has resulted in a reduced Average Selling Price, however margin rates on current products have generally improved, and customers’ reaction to the pricing changes and product improvements have been very positive. Further work is in progress around price elasticity with a view to improving gross margins and the one-off clearance of discontinued products is on track.”
Red Shed Christmas same-store sales were down 2.8%, whereas they were down 4% in the first quarter, the 13 weeks to 29 October.
While Mr Grayston said the Warehouse Stationery ‘Blue Sheds’ were preparing for their peak back-to-school trading season – which is annual – he added: “However, we expect sales to be down about 6.5% at the first half based on softer performance of communications & technology segments, and the one-off impact of the integration of the Blue Sheds’ business onto core Red Sheds operating systems at the start of the financial year.”
Mr Grayston said the technology & appliance retailer Noel Leeming continued to perform strongly and outdoor gear retailer Torpedo7 had been steadily improving all year. Torpedo7 founders Luke Howard-Willis & his father Guy sold a majority stake to The Warehouse in 2013 and exited completely in early 2016.
Moving on from what looks like weak Christmas trading by the Red Sheds, a continuing downturn in the Blue Sheds, no indication of how well Noel Leeming did over Christmas and an indication that The Warehouse hasn’t yet got to grips with a small retail chain it fully acquired in March 2016, Mr Grayston was keen to focus on transformation – but warned not to expect benefits too soon: “While we are all keen to start delivering the benefits of our transformation, we have a long way to go, but these are encouraging signs. H1 trading to date has confirmed for us that our customers like and have responded well to our pricing & product changes. We continue to invest in technology and build out the team to execute the next steps in our change programmes.
“Our forecast for first-half (to the end of January) adjusted net profit from continuing operations for the group is $32-$35 million, which is 22-28% down on the comparative continuing operations performance last year.
“The result for the half includes a significant accrual for a redesigned incentive programme, intended to reward better than expected financial performance along with reinforcing specific behaviours necessary to execute the transformation. It recognises the need to retain staff and recruit top global talent through this rapid period of radical transition. If the second half-year performance fails to deliver on our improved outlook, the accrual will be reversed to profit. If not for the accrual, our financial performance in the first half would be close to last year’s.”
A word from the chair
Warehouse chair Joan Withers added: “Many of the operational impacts on profit performance are transitional in nature and not expected to recur. The Warehouse Group is in the process of a fundamental transformation to improve performance & profitability, which is our key focus for 2018.”
The company will issue its full-year guidance along with the first-half financial results on Thursday 8 March.
12 January 2017: The Warehouse reorganises
Attribution: Company release.