Warehouse Group profit plunges 67% in 'tough year'

Bikes, bad weather and coy consumers are The Warehouse's top culprits behind a drop in net profit of 67 percent.

The Warehouse Group says a drop in gross margins and rising costs drove down net profit by 67 percent, while record-high Red Shed sales offset weakness in other brands.

"It's been a tough year for both us and our customers," chief executive Nick Grayston said.

Key numbers for the 12 months ended July compared with a year ago:

• Net profit $29.9m vs $87.1m
• Revenue $3.4b vs $3.29b
• Underlying net profit $37.5m vs $85.5m
• Gross margin 33.4% vs 36.1%
• Full year dividend 8 cents a share vs 20 cps

Speaking to Checkpoint, he said work to change tactics in the face of changing conditions would pay off, but had been costly.

"It was a confluence of a number of things - coming off a couple of record years of profit we made the commitment to be able to spend more than double what we would normally spend on pushing through a transformation, so a lot of commitment to cost and expense," Grayston said.

"That came at a time where - sort of October, our critical Christmas quarter collapsed consumer confidence, and it took us some time to de-leverage those costs."

Global pressures also impacted on their profitability as costs rose and plans had to be changed.

"A bunch of margin pressures - everything from commodity prices through cost of shipping, a lot of shutdowns of Chinese ports caused a very lumpy supply chain, and that drove distribution costs up.

"So a really tough first half. We spend the rest of the year putting the business into what we think is a better position to be able to resist what we think is going to be an ongoing challenge to our customers.

"So, tough year for us and tough year for a lot of our customers."

What was not selling?

Red Sheds sales rose 9.6 percent during the year, while sales fell for the other main brands: Stationery was down slightly at 0.4 percent, Noel Leeming down 3.3 percent and Torpedo7 was down 5.4 percent.

Weak consumer confidence had seen a shift in spending especially for big-ticket items, travel and entertainment, Grayston said.

"These factors have compromised our margin and profitability and particularly affected Noel Leeming and Torpedo7."

The first half was more difficult than the second half, he said, with profitability hit by increased costs, supply chain disruption, and rising promotional and discounting to drive sales.

"Torpedo7 was a particular challenge during the year as sales were impacted by decreased consumer demand and profitability was significantly affected."

Bad weather during summer, had been a major blow for Torpedo7, he said.

"With the confluence in the Southern Hemisphere of Christmas and summer, if you have bad weather in the summer that's a double-whammy - along with collapse of consumer confidence.

"We are committed to the business at this stage, we have a turn-around plan in place, we have a lot of detail around that. But the business has got to prove that it can stand on its own two feet.

"A lot of the pain we experienced this year was specifically from the bike business, [bike sales have] been very buoyant through the Covid years, and took a real hit. Everyone's got bikes, it's a global phenomenon.

"We've got too much bike stock, and we have other areas that also have too much stock, but bikes is the biggest issue. That will require discounting to move. It's not just us, it's the whole bike market."

Grocery sales doing well

On a brighter note, Grayston said its expanding range of grocery items had been popular with customers, accounting for 18 percent of total group sales.

"We have experienced 91.8 percent growth in pantry and chilled, 26.6 percent in household cleaning items, and 23.8 percent in pet care."

However, the expansion of the grocery business was not easy, he said, with recent legislative changes failing to resolve access to wholesale supply at "fair prices".

"We're up against some very big players who are very comfortable with the status quo.

"Our strategy is not to become a fully fledged supermarket chain, but we are working hard on offering distressed Kiwi families affordable groceries.

"We're in the process of trying fresh fruit and vegetables - that's in 12 stores. We're growing our private label market kitchen range. And particularly in pantry and chilled goods were up 92 percent.

"The big challenge to us is really access to wholesale supply at fair prices, and ... we're struggling to get equitable access."

Weet-Bix supplies cut off

Among the chain's problems in offering groceries, is a sudden cut-off to their supplies of the ubiquitous Weet-Bix breakfast cereal, which manufacturers Sanitarium have told The Warehouse it has to pause.

Which has led to a complaint to the Commerce Commission, by The Warehouse.

"That's very concerning for us," Grayston said. "We got a notification a couple of weeks ago from Sanitarium that they were going to stop supplying us with Weet-Bix come the 30th of September, which is tomorrow.

"We've had Weet-Bix 1.2kg family pack in The Warehouse since 2001, it's a key breakfast staple, and a key element of a Kiwi breakfast.

"We sell this item for $6 in our stores. It's $8.20, at Countdown and $8.29 in New World, so we're by far the cheapest ... Pak'nSave sometimes promotes it and get down to our price, but that depends on where you live. We don't make much money on it, but this is really really important for our customers."

Grayston said they had tried to work with Sanitarium on a solution.

"There is only a small shortage in terms of Sanitarium's ability to supply, so we don't think cutting us off completely rather than rationing everyone is the right answer," he said. "We've asked them to reconsider on several occasions.

"They are telling us that 'last in, first out' ... we weren't actually the last in.

"We don't think that this is fair - we don't think it's fair on us, we don't think it's fair on Kiwi families that are already under pressure. Which is why we've asked the Commerce Commission to investigate. We think it's very suspicious.

"It means that hard hit Kiwi families will have to pay more. ...But we're not going to stop fighting to keep essentials affordable for Kiwi families."

Sanitarium earlier said it would not comment on its production and stock levels, or its commercial relationships.

What lies ahead?

The Warehouse Group was taking a cautious approach to the year ahead and would adapt to changing conditions, Grayston said.

"Torpedo7 is our most challenged brand, and we will be reporting on the performance against our recovery plan at half year.

"We have also capped project expenditure to $80 million in FY24 with a focus on delivering major projects that are in flight.

"We continue to invest in the transformation of the group, particularly in infrastructure."