ar11-lr-final
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Chairman and<br />
CEO’s report<br />
The 2011 financial year, although<br />
challenging from both an economic<br />
and retail perspective, again<br />
demonstrated the underlying resilience<br />
of our core business. As such, your<br />
Board is confident that the strategy<br />
we are embarked upon, which focuses<br />
on retail fundamentals including a<br />
significant allocation of capital directed<br />
at getting those fundamentals right,<br />
will translate into sustainable sales<br />
and earnings growth over the medium<br />
to long term.<br />
Despite the challenging conditions experienced in<br />
the past year, we have maintained overall profitability,<br />
continued to generate strong operating cash flows<br />
and have delivered solid returns to shareholders by<br />
way of ordinary dividends.<br />
Group sales for the year ended 31 July 2011 were<br />
$1.667 billion, down 0.3% on the previous year.<br />
Sales for the second half were $759.8 million compared<br />
to $753.8 million last year, up 0.8%. Adjusted net profit<br />
after tax for the year, excluding unusual items, was<br />
$76.0 million compared to $83.4 million in F10,<br />
down 8.9%. Net profit after tax for the second half,<br />
excluding unusual items, was $23.1 million compared<br />
to $26.4 million in the second half last year.<br />
Reported net profit after tax for the year was<br />
$77.8 million. This compares to reported net profit after<br />
tax for the previous year of $60.2 million which included<br />
a $22.8 million non cash charge required as a result<br />
of changes made to the deductibility for income tax<br />
purposes of depreciation on buildings.<br />
The Warehouse<br />
The Warehouse reported sales of $1.463 billion<br />
compared to $1.476 billion in F10. Both total sales<br />
and same store sales were down 0.9% for the year.<br />
Sales for the second half were $654.9 million,<br />
flat on the comparable period last year with same<br />
store sales up 1.4% for the half. The Warehouse<br />
delivered an operating profit of $98.8 million for the<br />
year compared to $112.7 million last year, down 12.3%,<br />
mainly a function of sales deleverage and increased<br />
store related variable costs.<br />
Despite the challenging environment, positive sales<br />
momentum was maintained in all our growth categories.<br />
Our ‘Everyday Needs’ category was up 4.9% year-on-year<br />
and a solid contributor in the second half of the year. The<br />
success of our investment in online retailing continues<br />
with sales doubling as we continued to expand our range<br />
and drive traffic to the site. We will have nearly all of our<br />
core categories strongly represented online by mid 2012.<br />
The market was particularly difficult in our core ‘Head<br />
to Toe’ and ‘Home’ categories. Whilst volumes were<br />
up year-on-year, these key categories delivered flat<br />
sales overall due mainly to the effects of price deflation,<br />
in part due to a strong NZ dollar compared to the<br />
US dollar. We are also continuing to feel the effects<br />
of structural changes occurring in the entertainment<br />
and consumer electronics categories driven by the pace<br />
of technological developments impacting the way these<br />
products are now delivered to customers.<br />
While the underlying results are down on last year,<br />
we are confident in the strength of our core business.<br />
Looking forward, the company is now focused on<br />
implementing a strategy based on improved retail<br />
execution and significant capital reinvestment in the<br />
company’s stores. We recognise it will take time to<br />
build momentum with the level of investment required<br />
planned to be made over a five year period.<br />
We are confident that customers will respond positively<br />
to what we are doing; we believe this will translate into<br />
sustainable sales and earnings growth over the medium<br />
to long term.<br />
Warehouse Stationery<br />
Warehouse Stationery reported sales of $201.5 million<br />
compared to $193.6 million in F10, up 4.1%. Same<br />
store sales were up 4.6% for the year. Sales for the<br />
second half were $103.4 million, up 6.1% with same<br />
store sales for the period up 6.0%.<br />
Warehouse Stationery achieved an operating profit of<br />
$10.1 million for the year. This compares to operating<br />
profit for F10 of $8.0 million which included one off<br />
charges totalling $1.2 million relating to restructuring of<br />
the company’s distribution function.<br />
We enjoyed significant growth in computer products and<br />
mobile phones over the period, a result of focusing on<br />
our ‘Heart of the Office’ proposition. Footprint expansion<br />
is also delivering the desired increase in sales and EBIT<br />
growth with eight new stores now having been opened<br />
over the past three years.<br />
Dividend<br />
The Directors have declared a <strong>final</strong> dividend of 6.5 cents<br />
per share bringing ordinary dividends for the year to<br />
22.0 cents per share, down 2.0 cents compared to the<br />
previous year. Dividends will be fully imputed at 30.0%.<br />
Total dividends for the year represent a payout ratio of<br />
90.1% in line with the company’s stated policy.<br />
The <strong>final</strong> dividend will be paid on 16 November 2011<br />
with the entitlement date being 4 November 2011.<br />
Management and Board Changes<br />
This year heralded significant change in the leadership<br />
of The Warehouse and its Board. Ian Morrice stepped<br />
down as Managing Director in May 2011 having led the<br />
business through a period of unprecedented change<br />
in both the economic and competitive environments.<br />
Ian maintains an executive role with the business until<br />
November 2011.<br />
Group Chief Executive Officer Mark Powell assumed his<br />
new role in May 2011. Mark has held senior roles with<br />
The Warehouse, most latterly as Chief Executive Officer<br />
of Warehouse Stationery where he has led a team<br />
implementing a new strategy and achieving positive<br />
sales growth.<br />
Coinciding with the Group Chief Executive Officer<br />
change, previous Chairman Keith Smith became Deputy<br />
Chairman and was succeeded by Graham Evans. Keith<br />
has been involved with The Warehouse Group since the<br />
first store was opened in 1982, and was Chairman from<br />
1995. Graham has been a Director of The Warehouse<br />
Group since 1998. He brings considerable experience<br />
to the chairmanship, with more than 40 years in the<br />
New Zealand retail sector, including his tenure on<br />
The Warehouse Board and 16 years as Managing<br />
Director of Woolworths NZ.<br />
In July 2011, we welcomed our new Board member,<br />
Ted van Arkel, to the Board. Ted is an experienced<br />
professional director with significant retail experience,<br />
adding to the depth and breadth of commercial skills<br />
on your Board.<br />
Mark Callaghan regretfully resigned as a Director<br />
in July 2011 to take up an executive role in another<br />
organisation which is a supplier to The Warehouse.<br />
After 15 years as a Director of the company,<br />
Rob Challinor announced his intended retirement.<br />
Rob has made a significant contribution to the<br />
development of the company, particularly in the areas<br />
of corporate governance, financial reporting and<br />
corporate strategy, including acquisitions and<br />
divestments. Rob’s commercial and technical skills<br />
will be greatly missed. His retirement will take effect<br />
after the conclusion of the 2011 Annual Meeting<br />
on 25 November.<br />
Capital Investment Intentions<br />
The company recently announced a capital investment<br />
programme of $430 million over a five year period.<br />
This includes investment across a wide spectrum<br />
of retail activity including new stores, upgrades to<br />
both the exteriors and interiors of existing stores,<br />
systems infrastructure and a number of product related<br />
merchandising initiatives. As part of this strategy,<br />
The Warehouse opened a larger replacement store<br />
in Gisborne and completed extensions to the Timaru<br />
and Pukekohe stores. Construction of the Silverdale<br />
Retail Centre commenced during the year and we are<br />
about to commence construction of a new store in<br />
Royal Oak. In addition, investment in store refits and<br />
modernisation was undertaken with significantly more<br />
planned over the coming years.<br />
Four new Warehouse Stationery stores opened during<br />
the year in Kerikeri, Gisborne, Riccarton and Levin as<br />
part of our strategy to achieve national coverage.<br />
Outlook<br />
Whilst the general economic outlook for New Zealand<br />
has supported reported improvement in consumer<br />
confidence, a number of factors, both domestic<br />
and international, point to an economic backdrop<br />
characterised by continued uncertainty and volatility.<br />
As such, the extent of any underlying growth in retail<br />
spending is uncertain and some pressure on earnings<br />
is likely to remain in the short term as we work through<br />
the early stages of implementing our strategy.<br />
Although our objective remains to deliver value to<br />
shareholders over the long term, having assessed a<br />
number of factors, including the shorter-term impact<br />
of the company’s strategic plan and reinvestment<br />
programme, the Board is of the view that earnings for<br />
F12 are likely to fall below that achieved in F11.<br />
We have a sound core business with strong<br />
fundamentals and a strategy to take the business<br />
forward. We also have passionate and dedicated<br />
Team Members throughout our business who deliver<br />
value to our customers every day.<br />
As we go forward into the new business year,<br />
we would like to thank everyone who makes us an<br />
iconic business: our customers and suppliers, our<br />
shareholders and Team Members – we thank you<br />
all for your commitment and ongoing support.<br />
Graham Evans<br />
Chairman<br />
Mark Powell<br />
Group Chief Executive Officer<br />
CHAIRMAN AND CEO’S REPORT 06<br />
CHAIRMAN AND CEO’S REPORT 07