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The Warehouse Group’s Nick Grayston talks fundamentals and digital futures

The Warehouse Group has reported jobs cut, services sold and a complete restructure for the goal of retail simplification in its second-half financial report. The Warehouse Group chief executive Nick Grayston shared the causes behind this mixed result.

By Courtney Devereux | September 22, 2017 | News

The board of The Warehouse Group today announced their net profit after tax to be $59.2 million, which is down 7.7 percent when compared to $64.1 million for 2016.

According to the NZX, The Warehouse Group (TWG) saw an increase of continuing revenue by 1.9 percent up from the previous year. Although it saw an increase in continuing revenue, operating profit decreased by 3.0 percent, as did EBIT (-16.3 percent), PBT (-16.8 percent) and earnings before shares saw a decrease of 73.9 percent.

The company’s brands, which include The Warehouse; The Warehouse Stationery; Noel Leeming and Torpedo7, saw mixed results among operating profit for each. The Warehouse saw store sales decline by 0.6 percent (although up 1.2 percent for the full year) and operating profit dropped 5.4 percent year on year reflecting.

The Warehouse Stationery saw a decline of in-store sales of 2.6 percent, but an increase in operating profit of 10.2 percent to $14.3 million. While Torpedo7 saw the opposite, with a growth of store sales of 6.1 percent and a decline of overall operating profit of 20.9 percent from $3.4 million in 2016 to $2.7 million in 2017.

Noel Leeming stores saw an increase of almost 60 percent (59.9) profit growth, as in-store sales grew and two new stores added to improved product margins. Grayston credits this impressive performance to dedication to that particular arm of the company.

“Well, we’ve had the business for about four years… But it’s a combination of good retail practises and an exceptional team of retail managers and operations over at Noel Leeming who do a fantastic job of training our associates.

“In conjunction with the investment we’ve put back into that business, it’s really gratifying to see us get paid. I think we have invested, in addition to those core retail disciplines, to add a service arm to the business which will be a competitive advantage. Having good locations and being able to put our trade technicians into people’s homes is part of that advantage.”

Reported net after profit tax for The Warehouse Group over the full year was $20.4 million, compared to $78.3 million in 2016. Grayston acknowledges the sale of its financial arm as to why the bottom line fell $57.9 million.

“What I would say is that the main drivers are the cost of the restructuring, which we signaled when we announced it, and it was certainly in the range that we forecasted, but that in itself will enable us to take out the cost. The second part of it is about making the business set for the future – so we’re happy to have done that.

“As you think about it, the financial services and the subsequent disposal has been all about taking out complexity so we can really focus on our retail turn-around.”

Group retail sales were up only 0.3 percent, which has been linked to the cost of the internal restructure and the sale of the financial arm. TWG said one of its key achievements for 2017 was “restructuring and simplification of the group’s operating model.”

The restructure saw a total net reduction of 143 jobs, while the process itself revolved disestablishing around 500 people. Grayston says the redeployment for the restructure was part of the whole part to turn the business around.

“There is really two main parts of the strategy. The first is, fix the retail fundamentals, and the second is, invest in our digital future. So, this falls into the first category predominantly, and we have consolidated the management of the retail businesses and extracted central shared services model to create a new service of excellence.”

Although the total restructuring costs amounted to $12 million, 55 percent of which was redundancy costs, the annualised savings are expected to total $17 million. Seventy percent of that relates to saved salary costs.

This focus on restructuring and business simplification was also expressed in TWG’s sale of its financial services arm in July. According to Grayston, the sale of Warehouse Money allowed “us to take it off our own balance sheets and reduce the management time taken up in terms of doing that.”

“Candidly, we are very pleased with the way in which we are able to manage that business. We partner with Finance Now which is part of SBS Bank who are an existing partner. And rather than closing that business, we have sold it to them. So, they are able to continue to provide those values to our customers.”

“The other thing about the result - what we’re really pleased about – is, as you look at taking out and stripping back those one-off costs, it’s all about fixing the business,” says Grayston. “In the second half, having had a tough Christmas period in the red business, we saw a significant turnaround. So, we are already seeing the results of those strategic changes that we’ve made, as we execute things like retail simplification and the everyday low price.”  

It was expected that the sale of the financial arm would result in a write-down of around $16 million, which ultimately contributed to the profit after tax decreasing by $82.4 million along with a write-down of $17 million on software.

“Earlier in the year we took a right down on goodwill, those were partially offset by the consideration of Finance Now we received for the sale of it. Those were major drivers of the results.”

The report result included the impairment of goodwill and fixed assets totalling $40.1 million linked to the sale of the Financial Services business.

The internal restructure was expected to lower the operating margin, as Grayston says the increase of just 0.3 percent of group retail sales was anticipated by the company.

“What we signalled was that we were no longer going to chase unprofitable sales through high-low retailing. So, during the course of this year, we have fundamentally changed most of our structure, particularly in the red sheds. In that move from high-low pricing, which is so clearly failing the world over, which is unmanageable when you have online retailers who are ‘everyday low price’ every day.”

The low increase of group retail sales was unrelated to the 18.4 percent increase in online sales, as Grayston says the $200 million online arm is a relatively small part of the business so far.

“What I can tell you is that it’s still only 6.7 percent of total sales. So, $200 million as part of a $3 billion business, still a really small proportion. Having been through the change in the US, what we saw in 2012 was a sort of virtual double of the percentage of the business. Once you get confident around that it gives them the opportunity to leverage convenience. So, a lot of our investment is around allowing people to shop however they want to.” 

Consistent with last year and the year before, TWG’s dividends are now operating at 16 cents per share, and although a low share price could result in the company becoming a takeover target, Grayston says the company is in a steady position.

“16 cents a share is consistent for last year and the year before, our dividend policy is between 75-85 percent of earnings. This was 81 so it’s firmly within the range. We think it’s important to remain a dividend stock, we’re comfortable with how we’re structured financially. The benefit of the sale of our Financial services is that it’s now reduced our gearing to 23 percent which is in line, or now better, then our competitors, so that gives us the ability to invest in the future.

Regarding the possibility of a takeover, Grayston says: “Never say never.”

“Clearly, we believe that we offer great value. The nature of the ownership would make it quite hard to make a hostile takeover at this stage.”

Grayston’s vision for TWG for the first half included boosting omnichannel investment across the group. Now the focus lies on “digital innovation that will be separated from the retail business.”

“The next year we will see exciting progress with our digital strategies as we position the business to compete successfully in the rapidly changing retail environment.”

Grayston spoke of several new initiatives that will be introduced as we move further towards 2018.

“What I can tell you is that there are a number of different initiatives happening that are going to be housed within the investment vehicle of our tech incubator. Some of the stuff we’re going to be doing will be extremely groundbreaking: deep learning, artificial intelligence, marketplaces, ecosystems, payment platforms, tech approaches and other really exciting stuff.”

The evolvement of the multichannel retailer can be credited to the imminent arrival of international retailers – in particular, Amazon, yet Grayston says TWG is not worried about the giant settling over in Australia.

“We’ve anticipated not just the arrival of Amazon, who is certainly a global behemoth these days, but generally the growth of online retail and pureplays. Really the rise of ecosystems like Facebook and Google have become engines of commerce as well. It’s our intent to be able to follow and inspire the customer.”

“A lot of what we’ve done has been about modernising our business,” says Grayston. “Competition is intensifying and threats are coming from all directions we just need to make sure we’re as good as we can be and let people know that we have the ability to serve Kiwis better because we have been in their communities. And we have been serving them with great value for a long time – with the ability to serve them better than anyone else.”

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