ar11-lr-final

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