The Warehouse yesterday reported a 15% increase in annual after-tax profit of $89.8 million, but that was underpinned by a total $25.4 million in one-off gains from property sales and the release of warrant provisions.
Despite the seeming rise, investors sold off The Warehouse shares after the announcement as the details of decreasing margins, lack of financial guidance and rising debt were absorbed.
Without the one-off gains, The Warehouse's adjusted profit was booked at $65.2 million, in line with earlier guidance of $62 million to $66 million, but was 14% down on last year's profit.
Revenue from sales was up 3.9%, or $64.4 million, on a year ago at $1.73 billion.
The Warehouse shares, which were up 12.2% over the past six months, initially slipped yesterday by 2.76%, or 8c down, to trade at $2.82. The second-half dividend was held at 6.5c, totalling 20c for the year.
Craigs Investment partners broker Peter McIntyre said investors had underpinned the lift in share price recently, attracted by good dividend yields, and had been picking retailing would be coming off the bottom of its downward cycle.
"While the top line looked good, investors were concerned at reports about the [profit] margin erosion and rising debt levels," he said.
Mr McIntyre said market and investor confidence was also shaken by the lack of any firm financial guidance, with chairman Graham Evans saying he expected "mixed trading conditions in full year 2013", and some financial guidance would be provided in its half-year report in March next year.
"Their margin erosion really is something to be concerned about. The Warehouse result is nowhere near as robust as Briscoes [half-year result this week]," he said.
Chief executive Mark Powell said, "In line with our strategy, the full-year results saw sales and profit growth driven by key categories including technology, jewellery, health and beauty, baby care and men's and woman's apparel.
"I am especially pleased by the momentum we have seen in the second half of the year and the positive reaction from our customers to our refitted stores," he said in a statement.
Mr McIntyre said while The Warehouse sales increased 4% on a year ago, its cost of goods sold saw a stronger increase with gross margins down from 36.4% to 35.9%.
He highlighted that profit margins across both Red Shed and Blue Shed (stationery) had in the second half of 2010 been above 5%.
For the second half of 2012, the Red Sheds' operating profit was down 24% on a year ago and operating margins declined from 3.8% to 2.7%.
Similarly, for the same period, the Blue Sheds' operating profit was down 38% and its operating margins declined from 6.2% to 3.8%, Mr McIntyre said"These are not attractive margins. The head of steam the Blue Sheds had generated over the past two years appears to be dissipating," he said.
Mr Evans said 2012 was a "critical transition year" for The Warehouse to show it could grow sales and gross profit after "a number of years of declining sales".
It was still "early days" in the turnaround strategy but there was positive momentum and we are looking forward to this continuing in 2013, resulting in an increase in earnings.
Mr McIntyre noted net debt was up 69% on a year ago, because of inventory investment, costs related to strategic investment and a development at Silverdale in Auckland.
However, Mr McIntyre said, the recent sell-off of $117 million in assets after the balance date would reduce the debt significantly when the half-year result is reported in March.
