WHS - Warehouse Group

[Balance]

So H123 sales going to be about $110m than H122

But after all that effort they make $20m less after tax ...$26m before tax.

Increased sales impact $38m additional margin all gone from reduced margin %. That much improved margin they gloated about over last couple of years all gone.

And then costs up say $25m

Npat will be about $30m ...not much eh

Reduced margins and increasing costs not a good combo

Rather grim when HY22 results already showed reduced margins and increased CODB.

So this HY23 follows on an already poor result in HY22.

Market is going to react badly to this update.

[Muse]

Lower NZD impacts, (primarily showing in COGS), starting to come home to roost?

A wee bit sure but the full fx impact on cogs/gp% still to come in my view

At the end of september they noted they were 69% hedged (circa 8 months forward cover) at 67c, so that crucially covered the Q2. The uncovered position would have hurt no doubt.

But if they stayed true to their fx hedge policy they would have been taking forward positions in the mid and high 50c range, locking those rates into cogs in about 8 month time. I’d imagine many tranches of cover at varying rates (both good and bad) rather than one bulky purchase (like what pumpkin patch did during the gfc).

Spot fx is 64c so in any event the fx outlook for the WHS (and other retailers) likely to get worse on a realised effective basis for about the next 8 months on the back of these cover mechanics.

The erosion in gp more likely due to mix of product (more nil margin groceries) and eroding gp margins as part of the down cycle. Previous 2 years had very high sell thru with minimal need to discount, that has reversed. As volumes fall tiered based rebates fall and increase cogs.

Will be interesting to watch inventory and stock turn. A true warning sign in retail is when retailers at the end of a cycle keep buying high levels to obtain rebates which causes further issues down the line. An interim provision for stock obsolescence usually provided at half year.

[Ferg]

Nice one FTG and FM. Those USD rates in the second half of this year were a right pain for importers. Do we know the min/max for the WHS FX policy? In my experience when rates go South as they have, companies tend to meet the minimum requirement and take their chances on floating rather than lock in losses.

It also depends on the stock turn of the relevant items. Longer stock turns allows more time to jack up prices and recoup higher input costs. One needs to be on the ball much faster regarding costs and pricing for items with a much shorter stock turn. I can't imagine they will sit on their hands for long to wear margin erosion due to NZD/USD fluctuations.

As you say FM, the mix of sales will likely by a significant contributor where they have been selling relatively more of the lower margin products, as evidenced by the various grocery anecdotes. Not an easy task juggling prices and margins in this environment. High stock levels (if any) may also be a function of longer lead times and shipping disruptions over the past 24 months - some businesses had to increase safety stocks greatly to stay in business, albeit with some cashflow and storage pain.

[winner69]

They could headline the half year result announcement - Record first half sales for Warehouse Group

[Muse]

Nice one FTG and FM. Those USD rates in the second half of this year were a right pain for importers. Do we know the min/max for the WHS FX policy? In my experience when rates go South as they have, companies tend to meet the minimum requirement and take their chances on floating rather than lock in losses. It also depends on the stock turn of the relevant items. Longer stock turns allows more time to jack up prices and recoup higher input costs. One needs to be on the ball much faster regarding costs and pricing for items with a much shorter stock turn. I can't imagine they will sit on their hands for long to wear margin erosion due to NZD/USD fluctuations. As you say FM, the mix of sales will likely by a significant contributor where they have been selling relatively more of the lower margin products, as evidenced by the various grocery anecdotes. Not an easy task juggling prices and margins in this environment.

I’m not au fait with WHS’ hedging parameters other than what is in my post. Probably some notes in the AR or investor relations page.

But I totally agree with you in that when there are sudden swings in fx best laid plans are set aside or managed at bare limits. Above plan / mega purchases at spikes and de minimus purchases at lows. Probably depends a bit on the personalities involved and governance structures and how keen the board are at staying in line with board mandated hedging policies and I could only speculate how that dynamic plays out here

But being hedged at 67c during Q2 pretty respectable. Thats a level retailers can work with. But if they took out cover which I reckon they did that’ll be a headwind for the remainder of the year, as will the spot rate, relative to the last few quarters.

Good point re stock turn and fx relation. Redsheds has a v high stockturn and is their highest margin brand. Probably requires the most cover. T7 the lowest stockturn by memory.

Anyway thats it from me - a road trip beckons.

[winner69]

Guess its not a counter cyclical staple.

Didnt get to 5 bucks last xmas and certainly didnt hit 7 this year either.

The idea that WHS (mainly Red Sheds) are counter cyclical is a fallacy. What punters think should happen and what does happen in reality are poles apart.

Red Sheds sales tend to underperform total NZ retail sales in ‘tougher’ times …..during GFC was best example

[Panda-NZ-]

People won't give up their KFC though.. the poor chickens don't get a break.

RBD could be another value play ?

[FTG]

This latest trading update is a timely reminder for us that most, if not all, the WHS Group members operate in the 'high volume, low margin' sandpit. Put simply, The Red Sheds, Stationery, The Market, and for most product categories at NL & T7, operate as 'price takers', rather than 'price makers'.

I also ponder on whether the Red Sheds deciding to re-enter the FMCG sector (but only really tinkering at the edges at this stage?) is WHS just chasing another 'Nirvana mirage'? Once again the SMT thinking the easiest & fastest route to grow top-line is by 'being all things to all customers".

The financial health of a 'High Volume, Low Margin' enterprise tends to be very good when volumes are strong & growing (of course, a key caveat being that good operational & financial management disciplines are in place). However, once these 'price taker' enterprises find themselves in the position of sales starting to flat line, or worse falling, then look out!

Certainly not predicting WHS's demise, as they have been through a few economic cycles now, so one would expect them to be battle ready.

But success is not assured either. Retail is a cut throat industry and can't be run on auto-pilot.
J.C Penney, Nordstrom, Sears, Stein Mart.....

[nztx]

I’m not au fait with WHS’ hedging parameters other than what is in my post. Probably some notes in the AR or investor relations page.

But I totally agree with you in that when there are sudden swings in fx best laid plans are set aside or managed at bare limits. Above plan / mega purchases at spikes and de minimus purchases at lows. Probably depends a bit on the personalities involved and governance structures and how keen the board are at staying in line with board mandated hedging policies and I could only speculate how that dynamic plays out here

But being hedged at 67c during Q2 pretty respectable. Thats a level retailers can work with. But if they took out cover which I reckon they did that’ll be a headwind for the remainder of the year, as will the spot rate, relative to the last few quarters.

Good point re stock turn and fx relation. Redsheds has a v high stockturn and is their highest margin brand. Probably requires the most cover. T7 the lowest stockturn by memory.

Anyway thats it from me - a road trip beckons.

Wouldn't FX exposure valuation movements be provided for in each period though .. rather than being delayed
until later when the forward cover is used/applied for purchases ?

Volatility in rates could result in larger inter-period gain & losses in FX position valuations IMO

If I'm not wrong a deteriorating rate move in valuation of end of period cover should be being booked in each
reported period, including interims

In any case the market didn't seem to like the announcement, closing -20c (-7.14%) @ $2.60

[winner69]

1st quarter sales up 21.2% on pcp

YTD sales to December up 6.4% on pcp

If momentum continues through January wonder what 1st half sales growth will look like

They obviously think it’s going to be a +ve number because gross profit $s are going to be about same even gp% is down.