WHS - Warehouse Group

[macduffy]

It's interesting that MHI has a very low turnaround, something like 312 days. Low turnover is something they have been consistent with and that's probably because they are a manufacturer as well as a retailer.

Yes, I wouldn't put too much emphasis on stock turnaround, unless one is very strictly comparing like with like. For example, jewellery 'keeps' rather better than fried chicken!

[h2so4]

Imagen the Chicken would be really Fowl after 3 days.

Haha I get it.

[CJ]

Yes, I wouldn't put too much emphasis on stock turnaround, unless one is very strictly comparing like with like. For example, jewellery 'keeps' rather better than fried chicken!

Yes but it also increases your working capital requirements. Accepting that MHI is a manufacturer as well, if they could double their turn around, their inventory levels would half and that would free up cash which can be paid as dividends/reinvested in growth.

Re KFC, they would get food deliveries every day or two. they would have screwed very good deals out of the bun and chicken companies such that they are on a "just in time" inventory system. (note. KFC guaranties their chicken is fresh* (*unless they have to use their frozen reserves)). They would forecast the days sales, add a 20% margin and order than amount. It becomes difficult over the christmas/NY period when this may not happen and sales volumes are up (location dependant) as storage becomes an issue..

[h2so4]

Yes, I wouldn't put too much emphasis on stock turnaround, unless one is very strictly comparing like with like. For example, jewellery 'keeps' rather better than fried chicken!

Yeah more conventional figures like margin might be more appropriate but drilling down gives you a better understanding of the businesses economics.

I'm not worried whether it's chickens or diamonds.

[h2so4]

Yes but it also increases your working capital requirements. Accepting that MHI is a manufacturer as well, if they could double their turn around, their inventory levels would half and that would free up cash which can be paid as dividends/reinvested in growth.

Re KFC, they would get food deliveries every day or two. they would have screwed very good deals out of the bun and chicken companies such that they are on a "just in time" inventory system. (note. KFC guaranties their chicken is fresh* (*unless they have to use their frozen reserves)). They would forecast the days sales, add a 20% margin and order than amount. It becomes difficult over the christmas/NY period when this may not happen and sales volumes are up (location dependant) as storage becomes an issue..

This sort of explains how some low margin businesses make fat profits. The inventory can be likened to a bond that is continually reinvested many times during the year.

[craic]

Just read todays large catalogue from WHS. Reductions in many areas are quite remarkable - possibly low enough to suggest a cash flow problem? I started this thread yonks ago but I have not had shares in WHS for years.

[Balance]

Just read todays large catalogue from WHS. Reductions in many areas are quite remarkable - possibly low enough to suggest a cash flow problem? I started this thread yonks ago but I have not had shares in WHS for years.

Getting real and competitive to the prices of competitors?

[Snoopy]

Using inventory turns to get some business economic insights, HLG gets their 8% every 67.6 days compared to WHS who get their 4% every 89 days and

RBD an incedible/credible 2.7days for 6%. RBD probably smokes any retailer on the NZX.

SSD, I am very relieved to hear that my freshly fried KFC chicken is on average only 2.7 days old. Naturally that is the transition time from when it arrives as freshly dead bird rather than how long it has been sitting in the warmer! But it is all good to know.

Your comments on inventory turn are very poignant. However, I believe they are tangential rather than additive to this margin discussion. Why so?

Imagine two pallets containing sports shirts are unloaded off the boat in New Zealand. One pallet, containing sports shirts, goes off to the Warehouse. The second pallet containing All Black shirts goes off to the Rugby Union. The shirt colours differ. But both pallets of shirts came from the same factory in China with a cost price exactly the same to their respective buyers. Once in the respective buyers hands, this is where these shirts take different paths.

The Warehouse advertises a big sports shirt special. The result is all of their shirts are sold within one month. 'Everyone gets a bargain' so the net profit on each shirt is a modest $1. The promotion is so successful that the Warehouse orders another identical pallet of shirts. Once again there is a promotion of this second batch of shirts, and they sell out. The net profit margin is again one $1 per shirt. Flushed by this success, the Warehouse continues their winning formula shirt promotion for a total of ten months in a row with the same results.

In parallel to this, the original second pallet lands on the doorstep of The Rugby Union. The RU drip-feeds their All Black premium branded shirts onto the market spread over the full ten months of the rugby season. The net profit on each "All Black" shirt is $10.

Two scenarios have been painted. And now comes the key question: Which of the Warehouse or the Rugby Union has made the biggest margin on their shirts? From a product perspective the answer is easy. The Rugby Union makes $10 on each of their shirts compared to the Warehouse making only $1. The 'Net Margin' competition shows a win to the Rugby Union by a factor of 10:1. But this is not the full story.

'Margin' in management accounting terms means something a little different. It is impartial to whatever product or marketing chain has been used to achieve it. Management accounting 'margin' is really a measure of using capital efficiently. That is different to the 'Net Margin' and 'Gross Margin' bandied about by retailers selling stuff. Back to our original example.

The amount of capital used to buy the original pallet of sports shirts was the same in both the cases of the Warehouse and the Rugby Union. The Warehouse sold their stock quickly and recycled that capital, ten times in fact. The Warehouse did not need more capital to run their ten months of sales on sports shirts than the rugby union did for their single ten-month promotion of All Black shirts. At any one time both had only one pallet of shirts in stock. On a 'per shirt' basis, the Warehouse earned $1x10=$10 on their 'sports shirt capital' over ten months. The Rugby Union also made $10 on their 'shirt capital' over the ten-month rugby season. The "margin" (net profit / gross sales) in management accounting terms is therefore identical for both the Warehouse and the Rugby Union!

Here lies the point of the pallet shirt parable. It does not necessarily matter what the stock turnover rate is. Selling more goods over a shorter timeframe can be just as good as selling fewer upmarket goods with higher gross margins. The management accounting term 'margin' is disinterested as to how the dollars were earned. 'Margin' already takes into account stock turn. There is no need to go to another level of analysis of 'stock turnover' on its own to judge which retailer is doing the best job.

SNOOPY

[Snoopy]

Would you pay twice as much to buy HLG (8% margin) than you would to buy WHS (4% margin)? You would need to consider volatility of margins etc???

I would say that 'long term' a retailer with an 8% margin would be worth twice the price of a retailer with a 4% margin, everything else being equal. But buying the retailer with the highest margin might see you pay top dollar on the basis of that retailer having an exceptional season. Next season if the margin reduced, your buy might not look so smart.

Here is my previous estimate of the Warehouse margin for FY2012

Operating profit for FY2012 is forecast to be between $62m and $66m. Sales for HY2012 were $938m. If we add on last years second half sales of $760m that makes a revenue forecast of $1638m.

Now 'Margin' is 'Net Profit'/'Revenue'

So the WHS margin is forecast to be somewhere near:

$64m/$1638m= 3.9%

Repeating that same calculation for the four previous years gives the following results:

FY2011: $76.0m/$1667.7m= 4.6%
FY2010: $83.4m/$1672.7m= 5.0%
FY2009: $85.2m/$1720.8m= 5.0%
FY2008: $80.9m/$1735.0m= 4.7%

This means that FY2012 is looking to be a rogue year on the downside. If you were looking at buying WHS I would say on the basis of this one statistic that now is a good time to do so. Of course that is not the same as saying that WHS is the best retailer to buy!

SNOOPY

[Snoopy]

Am I allowed to ask the question;Why bother?

Because generally when retailing is depressed so are the retailers share prices. So now is one of the best times to look at buying retailers. Of course this strategy will not work in this instance if WHS goes into a death spiral. IMO though this is very unlikely. Investment is about playing the odds while other investors are gripped by irrational fear.

SNOOPY