By Tina Morrison
June 25 (BusinessDesk) - Warehouse Group's profit warning last week, which erased $94 million from the retailer's market
capitalisation, has raised concerns about the outlook for both its core business and the success of its acquisition
strategy.
The company's shares have shed 8.1 percent since it announced on Friday that profit this year would be lower than it
previously estimated as it cuts margins to boost sales of seasonal winter stock at its core 'red shed' stores which have
been crimped by warmer weather, and after sales and profits lagged forecasts at its Torpedo7 unit.
Warehouse, New Zealand's largest listed retailer, is in the process of rejuvenating its 91 'red shed' stores, which
account for about 70 percent of sales. To expand group earnings, the company aims to grow the 'non-red' side of its
business to be as large as the 'red sheds', having bought 11 businesses in 18 months, adding technology and appliance
retailer Noel Leeming, outdoor sports chain R Sports and online sporting goods retailer Torpedo7.
"The downgrade creates concern around the core business and future earnings growth," Forsyth Barr analyst Chelsea
Leadbetter said in a note. "Red Sheds has been a repeat offender behind recent downgrades despite significant capital
invested in the store base."
Auckland-based Warehouse acquired a 51 percent stake in Torpedo7 in April 2013 and has since raised its holding to 80
percent. Since Warehouse first invested in the business, Torpedo7 has acquired online fitness equipment retailer No.1
Fitness, online sports supplements company Shotgun Supplements and outdoor sports apparel and equipment chain R Sport.
"Integration of new acquisitions does take time, however missing sales targets at such an early stage of Warehouse
ownership does trigger concern," said Leadbetter. "There remains considerable execution risk for Warehouse's Torpedo7
division, as earnings and sales growth is still unproven."
Forsyth Barr has an "underperform" rating on Warehouse stock and Leadbetter downgraded her earnings expectations for the
coming three years by 12 to 13 percent following the profit warning.
The company's stock recently traded down 1 percent to $3.05.
(BusinessDesk)