Warehouse Group first-half profit falls as Covid-19 restrictions hurt

Tuesday, 22 March 2022

The Warehouse Group reported lower profit in the first half of its financial year.

The Warehouse Group reported an 8.2 drop in first-half profit as its stores were disrupted by Covid-19 lockdowns.

Net profit fell to $50.4 million in the six months to January 30, from $55m a year earlier, the company said in a statement to the NZX. Excluding the impact of restructuring costs and the repayment of the wage subsidy in the year earlier period, profit fell 57 per cent.

The company, which owns The Warehouse, Warehouse Stationery, Noel Leeming, Torpedo7 and TheMarket.com, said its Auckland stores were closed for 84 days due to Covid-19 Level 4 and Level 3 lockdowns during the period, accounting for 46 per cent of Auckland’s normal trading days. Outside of Auckland, its stores were closed for 23 per cent of their normal trading days.

First-half sales fell 4.3 per cent to $1.73 billion, with first quarter sales most impacted by lockdown restrictions, down 15 per cent, while second-quarter sales advanced 2.8 per cent, the company said.

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“We’ve had two quite distinct quarters – the first quarter being impacted significantly by a large number of our stores being closed and the second quarter with record sales over the Christmas and summer trading period,” said chief executive Nick Grayston. “It’s another reminder of how challenging the current environment is.”

The Warehouse sales fell 7.4 per cent, Warehouse Stationery sales dropped 10.6 per cent, and Noel Leeming sales slid 1.8 per cent. Torpedo7 sales bucked the trend, up 14.9 per cent.

Customers were increasingly shopping online, with online sales up 67.8 per cent to make up 19.4 per cent of total sales, he said.

The Warehouse Group chief executive Nick Grayston says the retailer is facing cost inflation but is selectively applying price increases, and has cut prices for some essentials to help low income families.

The company’s margins were squeezed in the first-half, as a result of disruptions to supply chains, increased ocean freight costs, and changes in products as more customers shopped online. The gross profit margin fell 150 basis points to 34.7 per cent.

Costs rose 6.3 per cent to $534.1m as the company employed more staff, increased wages, paid vaccine incentives, and lifted investment in TheMarket.com.

More staff were employed to greet customers in stores, scan QR codes and monitor the number of people in stores under Covid-19 guidelines. It also added staff in its distribution and fulfilment centres to handle the increase in online sales and click-and-collect deliveries.

The retailer didn’t provide full-year guidance, citing continued uncertainty in the trading environment.

“Looking ahead we are optimistic, but the remainder of (the 2022 financial year) will not be without bumps,” Grayston said.

The last couple of weeks had been “pretty rough” for foot traffic through the stores, but it appeared Auckland may be through the Omicron peak, he said.

“Moving through the acute phase of Omicron as well as opening our borders to tourism will have important positive downstream effects. However ongoing uncertainty created by Covid-19 and the war in Ukraine remain significant impacts for the global economy and our own. Shipping and freight costs as well as inflation are also contributing factors for New Zealand,” he said.

The company was currently in shipping negotiations, which was “pretty challenging”, he said, noting the average price for a 20-foot container had already risen massively to between about US$5000 to US$6000, from US$700 to US$800 prior to Covid.

“It's quite volatile at the moment, we haven't landed our next round of negotiations yet, but there's not going to be anything like the original pre-Covid costs anytime soon,” he said.

“You're already seeing a lot of cost price inflation,” he said. “We're particularly focused on making sure that we do everything we can, particularly in vital areas that customers rely on us for, to control those prices as much as we can.

“Customers are definitely stressed. It is unquestionable, the people particularly in lower socioeconomic groups are much more challenged and have less disposable income because things like petrol prices and rents are putting a hole in that.”

Grayston said the company was selectively applying price increases to keep costs lower for essential items at The Warehouse such as breakfast foods, children’s clothing, workwear, bedding, blankets, heaters and kitchen appliances like toasters.

“Some items will go down in price,” he said. “We've selectively taken some prices down because customers have needed them. So we're not just passing it on across the board.

“We have a list of 200 to 300 items that we're ultra focused on, because we think they're vital for Kiwis, and those we're doing everything we can to protect,” he said. “Some of the more luxury items that are more discretionary will inevitably get price increases, but we are making sure that we provide value.”

Chairwoman Joan Withers said while the current Omicron wave was impacting foot traffic in the company’s stores across the country, she expected spending to rebound.

“Given our history with lockdowns and experiences offshore with Omicron, we are expecting consumer spending to rebound post further declines in Omicron case numbers and the relaxing of restrictions,” she said.

The Warehouse will pay a first-half dividend of 10 cents, down from a 13 cent dividend last year.

Shares in the company rose 5.7 per cent to $3.13 in midday trading on the NZX.