WHS - Warehouse Group

[Balance]

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 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

Disagree, Snoopy.

WHS is returning to a discount format to regain market share so margins are going to take a step down.

Question then is whether WHS can increase sales to compensate for reduced margins (me does not think so) or reduce costs further to offset (service is already lousy so how is WHS going to cut costs further).

Best outcome for WHS is for Tindall to set aside his ego and sell to Woolworths.

Knowing him, it will not happen as he and fellow directors are still smarting over how they had their butts kicked in Australia, and came back to NZ with tails between their legs.

[macduffy]

Best outcome for WHS is for Tindall to set aside his ego and sell to Woolworths.

Knowing him, it will not happen as he and fellow directors are still smarting over how they had their butts kicked in Australia, and came back to NZ with tails between their legs.

I don't know Stephen Tindall but would think it very unlikely that Woolworths are still interested in buying WHS. Their original stake was bought to block WHS's groceries ambitions, as was Foodstuffs', and that's now a dead issue. Besides, WOW's general merchandise operations aren't exactly booming and are now taking a very much second fiddle place to the newer hardware businesses.

[Snoopy]

Disagree, Snoopy.

WHS is returning to a discount format to regain market share so margins are going to take a step down.

Question then is whether WHS can increase sales to compensate for reduced margins (me does not think so) or reduce costs further to offset (service is already lousy so how is WHS going to cut costs further).

Everyone is entitled to their opinion Balance. Yours may end up being the right one.

I wasn't aware WHS ever left their 'discount format'. The sales deterioration is noticable ($1,735m to $1,638m over five years), but not I would have thought terminal. Look at it another way. If WHS were able to lift their sales by $100m (a 5% lift) while keeping all fixed costs the same, that $100m in extra sales could make a significant difference to their bottom line. Perhaps that is how management see their way back to the growth path?

SNOOPY

[Snoopy]

At the moment HLG's margin is very high, but so too is its stock price. But how realistic is it to expect that HLG will be able to maintain its margin at that level in the coming months given the change in the economy, both here and in Australia where HLG does a fair chunk of its business? I don't see how it can do that. The exchange rate has come back sharply over recent weeks, which will put the price of the clothes it imports from China up, and consumer sentiment in the retail sector in both countries has turned flat. Both of these I would have thought would start to put the squeeze on HLG's margins, and ultimately, its share price. The WHS too is facing the same economic issues here in NZ in the retail space.

Many retailers have hedging arrangements so they can lock in the price of their future stock pegged to a known number. I don't know the situation of HLG as regards this. Of course hedging is really only a buffer, because ultimately all of these things run out. But a very effective buffer it can be.

I would tend to think WHS is less exposed because if people feel the pinch they can always trade down. My impression is that WHS have positioned themselves below HLG in terms of clothing price points. This is a reason I like 'discount retailers'. In theory they should be less affected by any retail recession. But then again I usually hold shares rather than look to trade them.

SNOOPY

[Snoopy]

So I suppose one observation and question I have is just how much weight should one put on the historical record of a company's margins in the process of judging its future profitability and share price?

Retail recessions are not a new phenomenon. I guess a key question would be, how did the retail share you are thinking of buying cope when it all turned to custard before?

SNOOPY

[CJ]

Retail recessions are not a new phenomenon. I guess a key question would be, how did the retail share you are thinking of buying cope when it all turned to custard before?

SNOOPY

And we have just gone through one. Look at historical margins like Snoopy did with WHS and if they are fair constant and range bound, then you have to expect that they should be reasonably accurate. Compare it to something like the airline industry where they swing from profits to losses (Qantas just annouced a 90% drop in forecast profit!) then it would be hard to place any reliance on historical margins as their would be no pattern.

From memory, so I could be wrong, one thing HGL has said is in its favour is that it has very short lead times. It can change its range very quickly (important for girls cloths) which is different to say a Nike store where the fashion is determined by the previous northern hemisphere seasons fashion and quantities may be ordered seasons in advance since they will all be batch made.

[BIRMANBOY]

Very interesting discussion and analysis, Snoopy, thanks for posting it. I wonder if your comment above might well be foretelling and forewarning of the future. At the moment HLG's margin is very high, but so too is its stock price. But how realistic is it to expect that HLG will be able to maintain its margin at that level in the coming months given the change in the economy, both here and in Australia where HLG does a fair chunk of its business? I don't see how it can do that. The exchange rate has come back sharply over recent weeks, which will put the price of the clothes it imports from China up, and consumer sentiment in the retail sector in both countries has turned flat. Both of these I would have thought would start to put the squeeze on HLG's margins, and ultimately, its share price. The WHS too is facing the same economic issues here in NZ in the retail space.

So I suppose one observation and question I have is just how much weight should one put on the historical record of a company's margins in the process of judging its future profitability and share price? I mean markets are forward looking, and I guess we invest in shares with the future in mind. We want the future share price to be more than what we paid. But in retail surely the current and upcoming economic conditions that will impact on the company are equally as important to deciding what retail company to invest in or to maintain an investment in, and in assessing whether its share price is over-or under priced? On that basis I now feel the HLG share price is overvalued, but I'm not so sure about WHS? So I'm wondering if the best time to buy retail stock is really when the share price is depressed, or whether it's better to buy when the economic outlook and consumer confidence is picking up?

Yes interesting philosophical question.....as Clint said in "Dirty Harry".."are you feeling luck punk"? Are you a contrarian? The most profound statement ever uttered in share/stock/whatever is "BUY LOW SELL HIGH". Problem is of course is whats "high" and where is "low". Since my crystal ball has a poor track record I make a practice of never buying anything unless its at a price that is historically low when viewed over a period of 2 to 5 years. Of course it could go lower..and sometimes does but the upside is that humans like a bargain and sooner or later there will be an upsurge in interest. (disclaimer...try to ignore death spirals but as long as fundamentals are sound and your stock isnt investing in new untested territory) WHS fits this ...its a sound business aimed squarely at what the average Kiwi wants...a huge selection of goods at good prices. Times are tough globally and tough going in NZ for many...this is why WHS is successfull, has been successfull and will be sucessfull for the forseeable future. Your average share trader presumably with some disposable income is NOT the target audience for WHS..so all the comments as to service etc are irrelevant. I bought more at 2.51 and if it goes down to below 2 I'll buy more again. The dividends are where the rewards are to be had. Its impossible to pick the perfect time to buy or sell so in my view it makes more sense to buy on an "average costing" basis and now is a good time.

[percy]

I would tend to think WHS is less exposed because if people feel the pinch they can always trade down. My impression is that WHS have positioned themselves below HLG in terms of clothing price points. This is a reason I like 'discount retailers'. In theory they should be less affected by any retail recession.

SNOOPY

Usually it is the other way round.Bottom of the market retailers such as WHS or PPG suffer most,while middle ground HGL and top of the market retailers such as Ballantynes just criuse along.

[h2so4]

Your comments on inventory turn are very poignant.

SNOOPY

SD, you are right. Cheers mate.

Something screwy in your example.

NZRU earns $10 net profit on sales of 1 pallet of stock. WHS earns $10 net profit on sales of 10 pallets of stock.

Clearly all things are not equal.

In this case the NZRU margin is 10% and WHS margin is 1%

[modandm]

Yes interesting philosophical question.....as Clint said in "Dirty Harry".."are you feeling luck punk"? Are you a contrarian? The most profound statement ever uttered in share/stock/whatever is "BUY LOW SELL HIGH". Problem is of course is whats "high" and where is "low". Since my crystal ball has a poor track record I make a practice of never buying anything unless its at a price that is historically low when viewed over a period of 2 to 5 years. Of course it could go lower..and sometimes does but the upside is that humans like a bargain and sooner or later there will be an upsurge in interest. (disclaimer...try to ignore death spirals but as long as fundamentals are sound and your stock isnt investing in new untested territory) WHS fits this ...its a sound business aimed squarely at what the average Kiwi wants...a huge selection of goods at good prices. Times are tough globally and tough going in NZ for many...this is why WHS is successfull, has been successfull and will be sucessfull for the forseeable future. Your average share trader presumably with some disposable income is NOT the target audience for WHS..so all the comments as to service etc are irrelevant. I bought more at 2.51 and if it goes down to below 2 I'll buy more again. The dividends are where the rewards are to be had. Its impossible to pick the perfect time to buy or sell so in my view it makes more sense to buy on an "average costing" basis and now is a good time.

+1

Well said sir.

If people think HLG compares with WHS in terms of quality they are dreaming. All it would take for HLG to go under is Uniqlo or the Gap or Zara to roll out 50 stores in nz. Which they could easily do. Could you say the same about WHS and Walmart - no. There simply aren't the sites avialable.