At the investor day presentation, there was an appreciation change needed to be made quickly and effectively. Standing still was not an option.
"There is a clear mantra to test ideas, ‘fail fast’ and learn from any mistakes without sinking major time or capital."
Across the business, material change was planned or under way, bringing uncertainty, she said. The company acknowledged there were many moving parts and a wide range of outcomes in its internal model.
Technology and data were at the heart of decision-making, Ms Kinnaird said.
The Warehouse Group had under-invested in systems and technology. From now on, they would be a key area of growth in capital and operating expenditure to provide tools to better inform decision-making, help the model be more responsive to demand and enable personalised customer communication.
Reducing business complexity had been a by-product of acquisitions and expansion, with little obvious cost synergies, she said.
Front and centre of the new strategy was getting back to retail basics, and removing complexity and inefficiency to enable a more flexible model.There was a greater focus on making best use of existing store footprints and leveraging the proximity to the customer in other ways to ensure the model remained relevant.
Execution would be critical, Ms Kinnaird said.The group’s targets were reiterated at the investor day.
"The Warehouse has targets in place for a material improvement in gross margins and lower cost of doing business over three years. This is materially ahead of our forecasts."
Given the leverage in the retail model, things could change quickly. There was significant risk of strategic changes taking longer than anticipated and the path to improved margins was not "smooth sailing".
There was also a risk growing competition would erode gains made, she said.
The group recently reported first-quarter sales of $645 million, down 1.7% on the previous year and weaker than expected.
The key positive results were Noel Leeming and Torpedo7 but they were outweighed by a fall in the core Red Sheds chain and a surprising deterioration in the Blue Sheds, Ms Kinnaird said.
Red Sheds’ same-store sales fell 4% as the move to everyday low prices led to heightened clearance and lower average prices. The lower prices outweighed volume growth.
Meanwhile, Blue Sheds — Warehouse Stationery — reported same-store sales down 8%, driven by internal execution issues and weakness in computer sales.
Forsyth Barr retained its underperform rating.
"We recognise there is considerable upside if the group achieves its cost out and margin targets, without a meaningful decline in sales. But the material transformation under way brings heightened risk and we retain a cautious stance on the timeframe and costs required to change."
To become more positive on the company required confidence in strong execution of the cost-cutting initiatives and other strategies to improve earnings, Ms Kinnaird said.
The Warehouse Group was not operating at its peak, which offered considerable opportunity. However, there was a risk some of the gains and improvements would be eroded by an increasingly competitive backdrop from companies like Amazon and Kmart.
Other risks included minimum wage increases, rent and unfavourable foreign exchange movements.
The Warehouse shares last traded at $2.10, down 1c. The shares have lost nearly 30% in value in the past 12 months. Forsyth Barr has a target share price of $1.90.
