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Is The Warehouse a Bargain?

08.05.2015

The Warehouse Group has come a long way in the last 10 years. Having developed a strong brand representing cheap goods sold through their red sheds empire, The Group have invested heavily to diversify their retail market exposure. The Group has since expanded to include 5 operating segments, The Warehouse, The Warehouse Stationary, Torpedo 7 Group, Noel Leeming, and The Warehouse Group Financial Services.

The Warehouse is predominantly a general merchandise and apparel retailer, selling discounted goods through its red sheds across New Zealand. In the lead-up to 2011 management identified the need for The Warehouse to be a retailer for the future, and committed $90m to an investment programme aimed at redeveloping their brand to be a “House of Bargains, Home of Essentials” retailer.

The Warehouse Stationary was started in 1991, and operates as a stationary retailer, selling office products from it’s blue sheds across New Zealand. The Warehouse Group subsequently acquired Noel Leeming in 2012 to expand their presence in the technology market, and Torpedo 7 in 2013 to obtain exposure to the outdoor sports market.

Consumer sentiment in New Zealand has been improving post-recession, and has been reflected in the sales growth reported by The Group and GDP stats provided by Statistics NZ. New Zealand reported an increase in household consumption on durable goods and services of 0.6% and expenditure on GDP growth of 1.1% for the December 2014 Quarter. Should this trend continue, The Warehouse Group is strategically positioned with a sufficiently diversified retail portfolio to take advantage of increasing consumer spending.
The Warehouse Group reported third quarter performance today, with positive news. Here’s the breakdown:

The Warehouse reported sales growth of 3.8%, with same store sales increasing 3.3%. The Warehouse has managed to achieve 4 years of consecutive sales growth. Major drivers include sales from the “Back to School” period, Apparel and Homeware. The Warehouse’s digital presence has been a valued contributor to sales, with the “click and collect” service making-up 20% of online sales.
The Warehouse Stationary reported sales growth of 2.9%, with same store sales increasing 2.1%. Consecutive sales growth has been achieved for approximately 6 years; reflecting a successful retail model.

Noel Leeming reported sales growth of 5.4%, with same store sales increasing 0.9%. Same store sales growth has likely lagged behind overall sales growth due to the opening of additional retail stores in NZ generating a greater portion of sales growth. CEO Mark Powell commented on the results, stating, “Its strategy of being the ‘passionate experts’ in this sector is providing a competitive advantage”. With sales growth of 5.4%, we would have to agree.

Torpedo 7 Group shows the greatest growth prospects, with sales growth of 8.5% compared to the third quarter last year. In the 2014 FY Torpedo 7 acquired a number of sport related businesses, No1 Fitness, Shotgun supplements, and R&R Sports. Continued growth in sales reflects a successful online retailing business, but can Torpedo 7 Group manage its appetite for acquisitions? CEO Mark Powell is confident regarding Torpedo 7’s future, he made the following comment, “Torpedo7 Group is still in its early stages of development and continues to work on the strategic direction of becoming NZ's leading outdoor, adventure sport omni-channel retailer.” Torpedo 7 is the rising star of The Warehouse Group, and we’re excited to see its contribution to the Group’s bottom line when it finds its moment to shine.

Overall third quarter performance has been positive from The Warehouse Group, consistent sales growth across all operating segments, and positive market sentiment in New Zealand. Of concern is the slowdown in Australia, where Torpedo 7 enjoys market exposure. However, this slowdown has been offset by the financial success of its businesses in New Zealand. The Australian Reserve Bank recently cut their OCR by 25 bps, which is intended to promote an increase in spending and economic activity. Should this strategy be successful, Torpedo 7 are well positioned to hit a homerun.

*Written by Tom McBride, Trainee Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

 

 

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