WHS - Warehouse Group

[h2so4]

Nice to see % age stock mentioned.Most retailers who go broke have too much over valued aged stock.Realisable/disposal price is nowhere near book value.From an investor's view it is impossible to judge the true value of someone like WHS ,BGR,MHI,or PPG's stock.Best way is to walk around a store and judge for your-self.Out of fast selling items,stuck with slow moving items sticks out.WHS used to be out of lollies after Xmas,and slow to restock.Then in clothing out of stock of larger sizes,with only selections of small sizes.In NZ you do not see a lot of thin shoppers in the Warehouse.!!! In retail you make money selling products.No stock of any item means no sales.Better to have slighty higher stock level with lower stock turns,which will result in higher profits.And so we go back to"if you give peoplw what they want,you will get what you want."

Well percy, after you have picked over all the jumpers there is not much left. I hope you managed to get a good pair of fingerless mittens for the winter.

[winner69]

rsists

In effect what you are finding out is how much mula has to be invested in stock and how quickly that money makes a profit and how quickly that money is reinvested.

Spot on Sulphuric .... and the better they do this the higher the market values their stock

Here is WHS, HLG and BGR relative performance

Note how HLG with its higher margin and higher stock turns essentially (in simple terms) makes $2.79 gross margin for every buck invested in stock ..... compared to WHS at $1.45 and BGR at $1.70.

As a consequence HLG trades at 3.8 times book value whereas the other two are a lot lower. HLG shareholders have been rewarded with a lot more MVA than BGR and WHS shareholders

Relative to HLG maybe BGR at 2.1 times book value is still slightly undervalued. Then again on these comparisons WHS at 2.9 book value is overvalued (esp relative to BGR). The takeover premium in WHS still persists

[percy]

Well percy, after you have picked over all the jumpers there is not much left. I hope you managed to get a good pair of fingerless mittens for the winter.

It is so cold here at present dare not expose any part of the body,so full mittens.It is pouring down at present,snow on the hills.If you get time tomorrow night watch a bit of the All Blacks vrs Ireland game.Look at how the crowd is dressed.I am heading over Arthurs Pass to Greymouth on Sunday,so that should be fun!!Have plenty of jumpers thanks.

[Snoopy]

One turnover x net profit margin is a percentage figure.

I would say:

'One Stock Turn x Net Profit Margin' is a percentage figure.

or in the more general case

'Number of Stock Turns x Net Profit Margin' is a percentage figure.

But 'Turnover' refers to the amount of cash going through the tills over a given period of time (usually a year). Turnover does not mean the same as Stock Turn! You may think I am being a pedant here. But the problem is if you take words that commonly mean something else and use them in a context and meaning that is best known only to you, then people will not understand what you are saying.

While I am being a pedant I will dob in myself as well.

Earlier in this thread I said: Margin = (Net Profit/Sales Revenues)

I then tried to deobfuscate that by saying: Margin Accounting Margin = (Net Profit/Sales Revenues)

On reflection I think the term I should have used was: Operating Margin = (Net Profit/Sales Revenues)

This is a different metric to 'Gross Margin' and 'Net Margin'.

SNOOPY

[Snoopy]

HLG with its higher margin and higher stock turns essentially (in simple terms) makes $2.79 gross margin for every buck invested in stock ..... compared to WHS at $1.45 and BGR at $1.70.

As a consequence HLG trades at 3.8 times book value whereas the other two are a lot lower. HLG shareholders have been rewarded with a lot more MVA than BGR and WHS shareholders

Relative to HLG maybe BGR at 2.1 times book value is still slightly undervalued. Then again on these comparisons WHS at 2.9 book value is overvalued (esp relative to BGR). The takeover premium in WHS still persists

This has been a most enlightening thread with a lot of retail knowledge coming out of the woodwork. There are plenty of contributors to this thread who know a lot more about retailing than I do, and I am not just referring to Winner (his post happened to be the last in line which is why I responded to it.)

Nevertheless from an investor perspective I don't believe I have to know as much as the rest of you do. As an arch-typical 'lazy investor' I believe in doing as little work as possible to satisfy my needs. I can get near enough to the same result as Winner by considering the 'operating margin' only.

Think about it: Operating Margin = (Net Profit)/(Sales Revenue)

So, the greater the 'stock turn' the greater the 'net profit'.
And the greater the 'gross margin' the greater the 'net profit'.

True I will not find out what the 'gross margin' actually is nor what the 'stock turn' is. But I don't have to know those figures. It is the retailers job to decide whether they gain their net profit by selling stuff slowly with a high gross margin or sell at a lower gross margin but make their money by selling a greater quantity of stock quickly. However they choose the do it I can consider them operating a retailing 'black box'. I don't have to understand exactly what they are doing because the net result will all come out in the wash, and be reflected in the 'Operating Margin' figure.

The managers of the store may find the 'stock turn' figures and 'gross margin' figures useful. But as an investor I don't need to worry about those figures. 'Operating Margin' captures all of the information I need to know to make a sharemarket investment decision.

Of course if you consider GMROI and 'Operating Margin' the relative proportional comparison will not be exactly the same between BGR, HLG and WHS. 'Net margin' is derived from 'Net Profit' and that means operating costs and interest are taken into account in one metric and not the other. Another point of difference could arise if the stock level at the end of the year is significantly different to the stock level at the end of the year. Pick any one statistic and there are always ways to pick a hole in the argument it presents.

In general though, I do think that operating margin is a sufficient statistic for answering the question:

"Which retailer has the highest margins?"

I think the rest of you have been working too hard on this!

SNOOPY

[winner69]

Snoopy - I thought you had correct earlier but I think you are now confusing the punters out there.

The commonly accepted definition of Operating Margin is Operating Profit / Revenues where Operating Profit excludes interest and tax .... in most cases EBIT though profits from capital sales and associates can throw a spanner in the work. The WHS accounts are a great example of setting this out

Your Net Profit (after tax) / Sales is generally called Net Margin

When you say which retailer has the highest margins are you suggesting that these are the best bets (investment). Would this preclude ever investing in the likes of WOW?

Things like GMROI, Gross Margins and stockturns are only a measure how well the investment in stock is managed. The cost of doing business is just as important .... like even HLG and their high margin and stockturns which generated $116m of Gross Margin last year would be a basket case if the expense base was $120m eh. That is where you Net Margin comes in

You are right - the 'lazy way' works quite well (I wouldn't call you a lazy investor anyway Snoopy ... you seem quite active).

But operating a business (esp retail) one would hope that they are not lazy. Most of those mentioned would know the GMROI of every SKU they sell at any one time. Shareholders wouldn't want them holding onto stuff that doesn't sell or having too many low margin slow moving items would they.

What can be interesting is assessing how the market sees the relative value of growth v margin and what would be rewarded more (for shareholders of course) - a 1% increase in margin or a 1% increase in growth. It is those sort of things that the big shareholders look at (instos) and apply pressure on the company to pursue the strategy they see fit

[h2so4]

Winner: You dont hear that often. "That Acid Man he's spot on" Thanks

SD: Your right, cheers mate

[Snoopy]

Snoopy - I thought you had correct earlier but I think you are now confusing the punters out there.

The commonly accepted definition of Operating Margin is Operating Profit / Revenues where Operating Profit excludes interest and tax .... in most cases EBIT though profits from capital sales and associates can throw a spanner in the work. The WHS accounts are a great example of setting this out

Your Net Profit (after tax) / Sales is generally called Net Margin

Winner if you turn to page 47 of the FY2011 annual accounts of the WHS themselves say:

"The operating margin is defined as operating profit divided by revenue."

If you then go to page 30, the Income Statement, you will see that the WHS states 'Operating Profit' and subsequent to that adjusts for gain on disposal of property asset,s adjustments for financial instruments, and equity earnings of associates. After that they take off interest expenses and tax.

It looks like those accounting boffins at WHS are in full agreement with you. Even to the extent of weeding out those profits from capital sales and associates which as you can may throw a spanner in the works. IOW you are dead right! Sorry for any confusion I may have caused others over the nomenclature!

Nevertheless I do prefer the 'net margin' measure (Net Profit (after tax) / Sales), what I have been using all through this thread, myself.
Why? Because in the past whenever I have borrowed money I have always had to pay the interest on it. Furthermore I always seem to end up paying tax on income I earn as well. It doesn't seem credible to me to use EBIT when as a small shareholder owner there is no way of getting out of paying the 'I' and 'T' bits. So I intend to keep using 'net margin' even if that term itself draws up a slightly confusing meaning in my brain (it sounds a little too much like 'net profit' and 'net profit margin' for my liking.)

SNOOPY

[Snoopy]

What can be interesting is assessing how the market sees the relative value of growth v margin and what would be rewarded more (for shareholders of course) - a 1% increase in margin or a 1% increase in growth. It is those sort of things that the big shareholders look at (instos) and apply pressure on the company to pursue the strategy they see fit

Perhaps I am a little naive in these matters. But surely institutions wouldn't try to influence WHS management to this extent? Isn't it up to WHS management to decide this stuff? Why would some merchant banker shareholder think they know more about retailing than WHS management do? And wouldn't a 1% increase in margin produce exactly the same shareholder benefit as a 1% increase in overall sales? Why would an institutional shareholder care which way management went if the result was the same?

SNOOPY

[Snoopy]

Your Net Profit (after tax) / Sales is generally called Net Margin

When you say which retailer has the highest margins are you suggesting that these are the best bets (investment). Would this preclude ever investing in the likes of WOW?

Woolworths Australia is a very special retailing case. My understanding of their business model is that they work on high turnover and bloody mindedness towards suppliers to the extent that they sell their good to the end line consumer before they have to pay the supplier for them.

The term 'operating margin' is almost superfluous, because technically you could say WOW never own the goods they sell so the operating margin is to some extent irrelevant!

As for using 'net margin' as an investment tool in general I think care is required. It doesn't take any more that a slow coming winter for sales of winter clothes to dip well below expectations. Retailers have to sell their stock off anyway at whatever price they can get and hey presto the margin in the end of year accounts goes down. Such an event is often not indicative of what might happen the next year.

What I look for in 'net margin' is evidence that given a steady state trading environment a company has the ability to increase it. That is not the same as saying that a retailer must increase their margins each year before I would consider investing.

Perhaps the greatest benefit of 'net margin' is to identify those retailers that year after year slowly see their 'net margin' ground down. A five year negative 'net margin' trend would be a big red flag to the investing me.

SNOOPY