Short-term cost cutting can restore profitability for The Warehouse

Friday, 12 July 2024

The Red Sheds and Warehouse Stationery are ‘core’ brands, but Torpedo7 has been sold.

The Warehouse Group plans to announce redundancies at its Auckland head office early next week as it aims to boost its share price through a short-term “cost out” strategy.

However, while retail analysts welcome the move, and the group’s refocusing on its core The Warehouse red sheds, Warehouse Stationery and Noel Leeming brands, they say the retailer has a big job to get its mojo back.

Investors in the under-performing big box retailer have seen the value of their shares fall 47.6% in the past 12 months as poor sales, and relatively high costs have disappointed the market.

In May, chief executive Nick Grayson resigned, but even before his replacement has been found the troubled retailer is pushing on with a restructuring aimed at refocusing the company, and bringing down costs.

“We have let our teams know that we will be proposing changes to our organisational structure next week,” The Warehouse Group said in a statement.

“This redesign will not affect any frontline team members and is about shifting our focus to our brands and driving our performance,” the statement said.

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Retail analyst Chris Wilkinson said The Warehouse needed to “win back the hearts and minds” of consumers, and to identify the product areas where it could once again be successful.

“It needs to become much more customer centric,” Wilkinson said.

In turning its performance around, the Warehouse faced competition on individual categories of product on many fronts, from powerful retailers like Bunnings, Mitre 10, Briscoes, supermarkets, Farmers, Chemist Warehouse, H&M, and Kmart. Ikea will open soon in Auckland.

Wilkinson felt The Warehouse needed to empower its local store managers to be really responsive to local demand, and become really community-minded.

“It’s a New Zealand retailer. It’s at the heart of many communities. We need a business like that. It’s success is important to New Zealand,” Wilkinson said.

Chris Wilkinson, managing director of First Retail Group, says the country needs The Warehouse to be successful.

“The Warehouse needs to regain its mojo.”g

The hard numbers make tough reading for The Warehouse Group shareholders when compared to Briscoes and Kmart with which it battles in the homeware market.

In its last full financial year, The Warehouse sold $3.4 billion of goods, but for every $1 of revenue, the cost of goods it sold was 66.4 cents.

By contrast, Kmart, which has its own Anko range of homewares, sold $919 million of goods, but for every $1 of revenue, the cost of goods it sold was 61.8 cents.

Kmart has expanded successfully into densely-populated areas.

Briscoes sold $791.9m of goods, but for every $1 of revenue, the cost of goods sold was 57.6 cents.

Staff costs at The Warehouse were also high compared to sales, though Forsyth Barr investment analyst Rohan Koreman-Smit said low-margin retailing could be successful, if enough product was sold.

The Warehouse Group had started doing the things it needed to do to turn the company around, Koreman-Smit said.

Last month, acting chief executive John Journee announced a reshaping of the business around its three core brands: the red sheds, Warehouse Stationery and Noel Leeming.

Ikea is going to launch in Auckland, bringing yet another competitor for The Red Sheds on some of its products.

It named executives to spearhead the operations and merchandising across The Warehouse and Warhouse Stationery, and was searching for someone to head up marketing and digital for the two brands.

It also named a chief executive for Noel Leeming.

It had sold off the underperforming Torpedo7, and later closed its online The Market business.

Koreman-Smit said The Warehouse needed to go back to basics after a history of expansions into non-core areas.

Forsyth Barr senior equities analyst Rohan Koreman-Smit.

“It’s all been a history of miss-allocation of capital,” he said.

The focus now had to be on fixing the three core operations, he said.

“It used to be a place where everyone got a bargain, and I think through the years it lost a number of customers, whether it be through not being competitively priced enough, whether it be through not having the right stock, or simple things like getting rid of basics they would sell week-in, week-out,” he said.

“You go there these days, and sometimes those things aren’t there.”

“That’s the next stage, that’s the harder stage. They’ve done the first bit, refocusing on the core, and getting rid of the loss-making divisions,” he said.

The Warehouse Group was a “hold” recommendation from Forsyth Barr.

“It is obviously a stock in transition for us,” Koreman-Smit said.

“In my view a cost-out story in the short term is quite an easy thing for them to action,” he said.

“Restoring some level of profitability by taking cost out is something you can get line-of-sight on.”

“The harder thing to think about is where is The Warehouse in two or three years’ time. That moves from taking cost out to bringing the customers back into the store,” he said.

The Warehouse Group was also searching for a new permanent chief executive, which Koreman-Smit said could take some time.