The Warehouse Group Ltd [WHS.NZX] has had a tough last few years. Profit has been flattish and sales have remained relatively stagnant.
The Warehouse is a company with a long established history in New Zealand as the bargain retailer and it has been a great investment for long term shareholders over the past 16 years.
Over the last 5 years though the company has stalled in growth and now faces more serious competition from its rivals.
It has been headed by canny Scot, Ian Morrice for the last nearly six years and he has done well to manage the company through the debacle of The Warehouse Australia and a clean exit from that market and a subsequent recession, especially felt in the retail sector.
Attempts at growing the business by moving into the supermarket sector failed and this move prompted Foodstuffs and Woolworths Ltd [WOW.ASX] to each take 10% stakes in the company with a possible view for a full takeover by either thwarted by the Commerce Commission and numerous legal appeals, so far, as senior as the Court of Appeal and a possible move in the Supreme Court.
What do we know of Ian's plans for the "Red Sheds" and how he intends to take the company into the future though?
With these things in mind and many other questions in my head I submitted questions from myself and Share Investor readers to Ian via email.
The Q & A
Share Investor - Your 2010 full year result of $83.2 million after adjustments for accounting, depreciation changes and company tax rate was flatish, compared to the 2009 full year result. What contributed to these profit levels and in comparison to last year how do you feel the company has performed considering the overall economy?
Ian Morrice - Overall the adjusted profit result was solid given the trading conditions. We held our share of the Department Store Sector for the year in The Warehouse, and Warehouse Stationery had an excellent recovery of both sales and profit.
SI - The Warehouse has had a series of flat results over the last few years on stagnant revenue. Do you see an end to this anytime soon and if you do what steps are you taking as CEO to grow sales and profit in the future?
IM - Key elements of our growth plans are: Investment in our existing stores, adding new space and developing New Zealand’s best retail multi-channel offer. We have set out our organic growth plans for The Warehouse and Warehouse Stationery in the results presentation (available on our website). Flat results over the last few years reflect the resilience of our business in very challenging market conditions.
SI - Looking towards 2011 do you think you will be able to beat the 2010 result and if not why not?
SI - You maintained margins at around 7.4%, how did you do that while selling so much stock just to quit it from inventories?
IM - We continually work hard to manage margins and costs, whilst remaining price competitive.
SI - Do you expect higher sales levels for 2011 and will that be at the expense of margins or not?
IM - We are targeting higher sales, any impact on margins will depend on the trading environment over the next 12 months.SI - CD and DVD sales were down markedly and they are likely to continue to drop in the coming years due to digital formats sold or obtained free from the internet. What is the company doing to fill the gap left from these sales from other retail categories. Could we see the warehouse partner up to sell digital music and movies online?
IM - We have been expanding space given to growth categories for some time, to offset this shortfall. We will offer downloading on-line when it is commercially viable to do so.
SI - What made you travel as far as you can go on the planet to head up The Warehouse when there must have been more opportunity in Great Britain and Europe?
IM - The Warehouse is a unique company which stands for something and genuinely makes a difference to the people of NZ – the chance to run a business like this is a great opportunity. Also it represented an opportunity for the whole family too.
SI - What are some of your business and management principles and what strategic planning method do you adhere to?
IM - Consistency, fairness and integrity; discourage politics and encourage development of people. Structured approach to continual strategic thinking, encompassing all common elements on modern strategic planning, including board participation.
SI - What are your medium to long-term growth plans (5-10 years) in terms of company size and revenue growth.
IM - Within NZ, organic growth of existing businesses to $1.9bn to $2.0bn in five years. Acquisitions remain a feature of our strategic thinking, both within NZ and Australia; depending on meeting our investment criteria.
SI - How is The Warehouse performing against competitors like Briscoe Group Ltd [BGR.NZX] Kmart and Farmers, are you winning the battle?
IM - The competitors mentioned we believe are in the department store sector of NZ Statisics and therefore we are more than holding our own in the last 12 months, based on our share of that sector.
SI - Brisoce Group, a direct competitor to The Warehouse in a number of retail sectors, has managed to grow same store sales over the last year, while the Warehouse has dropped its same store numbers. Why do you think that is the case?
IM - Some specialists have recovered sales lost over 2008 and 2009 when the drop in consumption hit them hard. The Warehouse has navigated the difficult conditions with resilience. BGR results are not unique and typical of specialists in the last 12 months, eg Warehouse Stationery.
SI - How are the all important margins tracking and how much emphasis are you placing on them given that Hallenstein Glasson Holdings Ltd [HLG.NZX] look to be doing better this year after a focus on margins rather than sales at any cost?
IM - Margins are always a vital component of the retail model, we always place emphasis on margins, relative to price/volume trade-off and inventory turns.
SI - What kind of profit margins are you achieving and can the company do better?
IM - Our operating margins compare favourably with either domestic or overseas retail groups.
Reader Question - Conventional wisdom suggests that the Warehouse grows sales/market share during harder economic times. However that does not appear to have occurred during the present recession, the worst in living memory. This has been reflected in a share price that has been flat for the last two years apart from one short-term spike. Does your analysis support this contention and if so, is the company confident that appropriate measures are in place to improve prospects in the medium term?
IM - This recession was not like the last one. Consumers stopped consumption to a significant degree in this recession, rather than the trade-down evident in the last one. This comment relates particularly to non-food items which are discretionary. Our sales and profits have been very resilient through this period compared to other retail groups. This has enabled us to fulfill our promise of increased returns to shareholders through this time.
SI - Ryman Healthcare Ltd [RYM.NZX] has recently announced a move into the Australian market while Telecom NZ [TEL.NZX] is selling up their Australian assets. Do you you see the possibility of The Warehouse going back to that market given the right opportunity and a more appropriate execution of an expansion there?
IM - We would consider it but not through taking the Red Sheds model to Australia.
SI - What mistakes were made when the company entered the Australian market in 2000 and how would you do things differently if you entered that market?
IM - Any future move into Australia would fully consider the competitive environment and the availability of the appropriate footprint in the right locations.
SI -Your decision to enter the grocery sector to compete with supermarkets that in a spin-off led to Woolworths and Foodstuffs both taking 10% stakes in the company. Did you give that enough time to succeed?
IM - We trialled our move into the grocery sector in a contained way and fully tested the economic model of a supercentre format. We believe that we had all the information needed to make our decision.
SI - Do you see either company making a full takeover offer anytime soon ?
IM - That’s really a question for those parties you mention.
SI - There are currently 87 "red sheds" in New Zealand. How much more retail space do you think the company could open in terms of stores or square metres of space?
IM - Around 30,000 square metres over the next five years.
SI - The "Metro" stores that you have thus far opened. How are they doing so far?
IM - We now have three small stores opened; Mosgiel, St Lukes and Rolleston. We are pleased with how they are performing overall.
SI - Is the push into online sales for the Warehouse going to plan and when will it start to make a profit?
IM - Yes – it is bang on plan for Year 1. We anticipate breakeven at Year 4 but cashflow positive already given it drives on-line shoppers into stores.
SI - Like most people, I like to buy brands. Why don't you carry a wide range of brands seen in your competitors stores; Nike, Sony LCD & Plasma TVs, Levis, Speedo, Bendon, etc, etc and wouldn't that get more people through the shop door?
IM - Whilst we don’t stock the brands you mention, we do stock a very wide range (and a large number) of brands. We are introducing new brands each year where our growth objectives are complementary with the brand owner. Examples very recently are: Arcosteel, Mayfair & Jackson, Bisley, Diamondback, Phillips, TomTom, Everlast, Dunlop, Mambo and Havianas …..
SI - I am often disappointed by the levels of service offered to myself, my friends and associates and think sometimes it is so low because New Zealand consumers have low expectations and don't complain. How well do you think your staff represent the company in terms of service levels to customers so customers remain loyal and keep coming back for more over the long term?
IM - Our service does vary across the country and at different times of the week – consistency is the challenge although many of our stores are very good and really know their local customers. We measure customer service in every store, every two weeks, and act on the results.
SI - Does the company have a mystery shopper program and if it does what has it revealed about service levels to the customer?
IM - See previous answer.SI - I have seen you a few times in a couple of Warehouse stores. Are these types of visits a regular thing for you and what do you learn in this way that you can’t from looking at regular sales figures and stats when sitting in your office?
IM - I can’t believe you are asking me that question Darren!! (I thought it was a fair question)
SI - The Warehouse used to been recognised as the place to go first to get the best price for just about anything. How has your competition been able to now meet or beat your price offerings?
IM - We are still the clear price leader overall in non-food. Scale competitors from Australia have low cost sourcing that enables them to be more competitive, however our footprint and operating costs remain the lowest relative cost in the New Zealand market.
SI - Is the overall retail sector saturated in terms of retail offerings or is the recession the main reason for the large number of retail failures and the slowdown over the last 2 or 3 years?
IM – Recession tends to flush out inefficient businesses in all sectors.
SI - On your higher dividends last year, you paid a special cash dividend of $0.15 on top of the full year payout of about $0.30 this year. Can investors expect a higher dividend come the September full year announcement if you can't really find any opportunities to use your cashflow for any other use currently?
IM - We have paid two special dividends this year and moved from 75% to 90% payout ratio. This is all consistent with us delivering on our promise to our shareholders over the last few years; superior yield.
SI - In my investing experience I have found the level of business leadership in New Zealand wanting – with a few very notable exceptions - when it comes to making good long-term decisions based on sound business skills, the basic understanding of running a business and accountability when it comes to making mistakes and this is often reflected in businesses hiring from an overseas talent pool. What are your views on how we can get good shareholder representation in the boardroom?
IM - Diverse and appropriate talent in the boardroom should always be the primary objective. Listed company directors have an obligation to act in the best interest of shareholders.
SI - What company or companies do you admire the most (apart from WHS) that you don't have a financial interest in and why?
IM - I admire Air New Zealand – good product, service innovations, and very good performance in a difficult sector globally.
SI - I have read Benjamin Graham's Security Analysis and find it crucial to long-term investing not just in the stockmarket but for investing in general. Have you read it and if you have what have you taken from it as its main points?
IM - I have made a note to get a copy and take a look!
SI - Who are some of your business mentors/heroes and why?
IM - I have been fortunate to work alongside some great leaders and business people over the past 30 years. I have tried to learn something from each of them.
SI - What was your first job ?
IM - I was a trainee chef (for about three months prior to starting on the retail shop floor).
SI - What excites you about retailing in general and the Warehouse specifically?
IM - The fast-moving pace of change, immediacy of results and the career opportunities for young people entering our industry. I am excited about The Warehouse because we continue to make a real difference to the people and the economy in New Zealand through what we do.
SI - What do you see as the strongest and weakest quality of your leadership style?
IM - I regard my strengths as integrity, approachability, passion and determination. Also being across the detail can be both a great strength and a weakness in retail.
SI - What has been your main achievement or achievements at The Warehouse over the last six years as CEO ?
IM - In financial terms: NPAT growth + 40%, debt reduced from over $300m to under $100m whilst returning over $500m to shareholders. I am also pleased to have enhanced our strong brand reputation - 90% of the population still shop with us every year. I am proud of the many leaders who have developed their careers in the business over this time - our talent retention levels are over 90%. We have improved and modernised every aspect of the business over the past six years from source to shelf and transformed our supply chain internationally and domestically enabling significant cost reduction.
We have built significant sourcing scale in China and put in place a comprehensive ethical sourcing programme. We continue to significantly reduce our impact on the environment and support our communities, raising over $2m annually.
We have established credibility in apparel and soft goods categories against significant new competition and I also believe that we have withstood the onslaught of new competitive retail space pretty well, given our very high market share position.
SI - Where do you see yourself and the business you help manage over the next five years?
IM - Re-starting organic growth through new stores and multi-channel is exciting and will pave the way for continued strong returns. Significant investment in our business will ensure that we remain New Zealand’s leading retail group in our sector in both market share and profitability.
Q & A End.
About Ian Morrice - Supplied by The Warehouse
Group Chief Executive and Managing Director - The Warehouse Group Limited
Appointed on 1 October 2004.
Previous roles were Managing Director Commercial and Managing Director B&Q Warehouse, for United Kingdom based B&Q Plc, the number one DIY retailer in Europe.
Ian was with Kingfisher plc for nine years and prior to that with Dixons Group, Europe’s largest electrical retailer, for 15 years.
Originally from Scotland, Ian has been in retailing since age 17. He has an MBA from the respected Cranfield University School of Management in the UK.
About The Warehouse Group - Supplied by The Warehouse Group
From small beginnings in Wairau Road in 1982, Sir Stephen Tindall’s amazing entrepreneurial ability combined with his team’s commitment to “give anything a go” shows you indeed that “nothing is impossible”.
In 1982 New Zealand was quite a different country; imports of many products were restricted so consumers didn’t have much choice and the products that were available were often expensive. The government had imposed a wage and price freeze and getting a housing loan required a savings record for 3 years before you were able to borrow at 18% interest and more! Shopping in New Zealand meant going to stores like George Courts and Haywrights; big established stores in towns and cities. Stephen and his team took a different approach; The Warehouse was located in the suburbs, with basic sheds, bins and racks and concrete floors. The Warehouse sold things never seen before in NZ such as banana loungers, rattan blinds and soccer ball radios, in fact the first Warehouse stores were filled with things that other companies couldn’t sell! When sales took off Stephen and his team went looking for suppliers and goods from around the world that could provide real bargains for Kiwi shoppers. With a relentless focus on keeping costs down and reinvesting profits to ensure prices were low the company culture began to develop in a unique (and successful) manner.
The other way in which The Warehouse was different to its competitors related to the people who worked for it – from the very beginning they mattered. There were Friday night barbeques, monthly team meetings and a chance to socialize afterwards, the famous red t-shirts worn by all staff including managers made it clear that everyone was working together as one team. Even today the legendary Birthday Day Off and annual company Conference with partners are important cornerstones of The Warehouse’s approach to its people.
An appetite for growth and a desire to see every New Zealander offered the opportunity to “enjoy a bargain” has seen The Warehouse grown from just 2 stores at the end of 1982 to 85 stores today. At no stage has the company sat on its laurels and so today it continues to strive for achievement; most recently shown by the entry into grocery, fresh food and pharmacy through The Warehouse Extra.
1982: First store opened in Takapuna, Auckland.
1990: First nationally distributed advertising mailer.
1991: Sales exceed $100 million.
1991: First Warehouse Stationery store opened
1992: Opening of first store of 25,000 square feet (2,322m2)
1992: Public float and listing on the New Zealand Stock Exchange
1992: Launching of The Warehouse card
1992: Opening of first store of 50,000 square feet (4,645m2)
1995: The Warehouse added to NZSE40 Index
1995: Introduction of green gardening department
1996: Opening of North Island Distribution Centre
1996: Introduction of the major AEG brand
1997: Introduction of the first store of 75,000 square feet (6,967m2)
1998: Introduction of apparel as a major department
1998: First shipment of parallel imported goods
2000: The Warehouse added to the NZSE10 index
2000: Sales exceed $1 billion
2000: Opening of the first store of 100,000 square feet (9,290m2)
2001: The Warehouse Financial Services launched
2001: First Triple Bottom Line Report produced
2002: The Warehouse celebrates its 20th Birthday
2007: Opening of The Warehouse Extra
2007: The Warehouse celebrates 25 years and still going strong
Disclosure: I own WHS shares in the Share Investor Portfolio
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