WHS - Warehouse Group

[madmike]

quote:Originally posted by stephen

I note the appointment of two UK executives into key positions. Heh. Step 1, appoint your mates as lieutenants.

mmmm very much in the food area...safeways and sainburys.....i like the cut of that type of jib.....how well did rbc do out of the petrol stations (ie challenging the big boys)???????

[whatsup]

Sub $4.00 WHS finding it hard to keep above $4.00!!!!

[Halebop]

The numbers from this analysis encapsulates a 6 year period, shorter than my preferred 7 year measurement but the data I kept for 1998 was substandard to base this analysis on. I'm sure I won't offend anyone with my views...

Business Tenets:

Is the business simple and understandable?
Yes. They sell General Merchandise and Office Supplies through Bulk Retail format in New Zealand The Australian operation is a bit more complex though, a somewhat mixed up hybrid Bulk Retail / Deep Discount format.

Does the business have a consistent operating history?
The original “Red Sheds” have been the traditional drivers of the business but profitability stalled and inconveniently declined just as the Yellow sheds started to reduce their high losses. Returns on the core Red Shed operation in New Zealand are still high but the trends have been soft. The underlying strength of the NZ business is still apparent. Give it a weak Yes.

Favourable Long term prospects?
Yes. They are the dominant General Retailer in New Zealand and market share counts for a lot. However Australia was a turnaround the moment they bought. Prospects here are far from certain.

Management Tenets

Is Management Rational?
WHS has been a company in growth mode for 20 years. Often it takes a growth company a long time to get over the fact that they've reached a plateau in the “S” curve, resulting in a period, sometimes years, of over-investment. WHS has proved no exception. They have continued to spend capital like a teenager and this fat has flowed to the hips, not to shareholders, as operations have become somewhat pear shaped.

If you are a company with problems, particularly issues with profitability and Capital commitments does it make sense to borrow your dividends from the bank?

They also say the right things like “we'll manage Capex more closely” then spend the greatest amount the company has ever incurred ($120m 2004).

Rational has left the building – No.

Is Management candid with shareholders?
No. Small changes were promised at the Australian operations at the time of acquisition but it soon became obvious the plan was to turn them into the Warehouse Australia. Had shareholders been aware of this the risks and costs would have been factored into the share price a lot earlier. When problems arose they took a long time to filter to the market. Nobody seemed willing to face up. Also, see Capex comments above.

Does management resist the institutional imperative?
Management paid top dollar for two separate Australian deep discount retailers with small format stores in the hope of turning them into the Warehouse NZ success. Not only was this strategy hopelessly flawed and expensive, it diverted management attention from the core Red Sheds and the embryonic Blue Sheds. Results at the core business are now suffering. After problems became apparent a successful turnaround or exit strategy obviously proved difficult to execute. Despite the problems, management still failed to reign in Capex and consolidate. Emphatic No.

Financial Tenets:

Return on Equity

ROE calculated NPAT on end of year shareholders funds...

1999 30.39%
2000 41.19%
2001 32.04%
2002 31.66%
2003 23.86%
2004 17.64%

Note: These numbers a more Return on Net Tangible Assets than equity as I ignore goodwill in my calculations.

What can you say? The trend is not inspiring. A five year trend in one direction. 2005 is destined to be worse. One argument presented as to why WHS have value is that the loss making Australian operations can be sold or closed to restore some profitability. While this is true, its unlikely anyone would want them in their current state and redundancies, lease commitments and other liquidation costs would likely eat more than any remaining residual value. To restore value WHS is practically committed to turning around the Australian operation whether they want to or not. Irrespective of the ultimate success of this strategy,

[Snoopy]

quote:Originally posted by Halebop

I'm sure I won't offend anyone with my views...

Great analysis Halebop - keep it up!

I am a relatively new investor in the Warehouse, attracted by the first severe market slump after nearly a decade of share price outperformance.

It is very easy to design a mathematical model that gives some fantastic future valuation for WHS, based on a good management record over many years (before the last couple at least). Ultimately though, you have to sit back from your mathematical model and ask yourself:

"Is what I am projecting realistic?"

If the answer is 'no' then it doesn't matter how sophisticated your model is. The law of 'GIGO' (Garbage In Garbage Out) applies.

And so it has been over the last couple of years with 'The Warehouse'.

It is interesting to compare this investment with my other NZ retail investment - Restaurant Brands.

On a business level I would say the retail management talent in 'The Warehouse' knocks the socks off anything seen in Restaurant Brands. WHS has a successful record of growth over many years whereas RBD has a successful record of stagnation over the same time period. WHS has in the past shown how to convert retained shareholder earnings into real growth, whereas all the growth attempted by RBD management has been marginal at best.

To some extent this is still reflected in the respective share prices with WHS trading on a P/E of 21 and RBD trading on RBD on a P/E of 14 based on FY2004 earnings. IMO, and despite the latest problems WHS is the better retailer by a first round technical knock out. It isn't really even a contest.

Put my investors hat on though, and things change.

WHS is going to have to work very hard this year to justify its share price. For although the price is hovering around a multi year low in dollar terms , in P/E terms it is still high. RBD, OTOH doesn't really have to do anything but bumble along and avoid any (further) footshots to justify the share price being exactly where it is.

For the medium term, I like both of these companies which is why I am still in both. In the short term, however, I have this feeling that RBD is more likely to tread water than WHS is likely to get significantly better. For me, that is enough to make RBD clearly the better shorter term *investment* performer of the two.

SNOOPY

THE KING says Good thinking Snoopy.. [^]

[duncan macgregor]

I fail to understand anyone having shares in a company in trouble. Both WHS and RBD are in trouble why bother with reasons or waste your time wondering why or how they might get out of it STICK TO WINNERS. When they start losing, get out, and look for a winner. LOSERS ARE FOR LOSERS, AND WINNERS ARE FOR WINNERS.
Any one that thinks different is a loser. The whole retail game is in general to competetive, BGR with never ending sales wont go to far unless they change direction. The warehouse needs to get out of australia, and RBD needs to get its act going, infact the worst of the three is a hard one to pick. I will venture the opinion that RBD is the worst, followed by WHS and BGR third. macdunk

Who ran Forth for the Double..

[Gryffyn]

Too simplistic Dunc. What about Hallensteins recently. Slogans are for losers methinks, investors look at value.

Define company in trouble.

Disc: No WHS.

[duncan macgregor]

GRYFFYN, It is simplistic Muck about with losers, and you become one.
Who cares what the company is worth if the promises ammount to nothing, and the profit drops. Stick to companies on uptrends with increasing profits. SNOOPY has done great analysis on RBD over the years which ammounted to nothing, with the share price dropping by half, in a bull run. Who cares about a divi when you watch your initial investment half in value. Stick on winning sectors first, winning companies second,and get the hell out of there at the drop of a hat. Never mind all the crap about working out what the company is worth, talk to the tea lady she will give out more usefull information than the accountant. Good news coming up buy. Bad news coming up sell very simple. MACDUNK
PS the tea lady has all the news

[Snow Leopard]

WHS (and CEN) seem to have dived at the end of the day.