The Warehouse Group exploring ‘dark store’ opportunities

The Warehouse Group says it is exploring opportunities to repurpose some of its physical stores as the proportion of its sales continue to increase online.

As group chief executive Nick Grayston puts it, the owner of The Warehouse, Warehouse Stationery, Noel Leeming, Torpedo7 and TheMarket has experienced “a decade’s worth” of online growth in two months.

The NZX-listed company recently closed and converted its Dunedin Central Red Shed store into a “dark store” – closed to the public, and dedicated to the fulfilment of online orders.

This is the only dark store outside of its fulfilment centres, but Grayston said the group was continuing to “look at those opportunities”.

The Warehouse Group posted an annual net profit of $44.5 million in the 12 months to August 2, down 32 per cent from $65.4m last year. Without the $67.7m it received in wage subsidies, however, it would have posted a $4.3m loss.

Net profit, adjusted for unusual items of $36.3m was $80.7m, up 9 per cent on last year. The unusual items included $22.2m in restructuring costs related to its internal shift to agile, including $13.7m in redundancy costs, $4m in asset impairment costs from store closures and consultancy fees of $4m.

It posted sales revenue of $3.2b in the year. Electronics brand Noel Leeming surpassed $1 billion revenue in the year, and Warehouse Stationery also had a record year. The company said its brands had benefited from the lockdowns and shift to work from home culture, as well as the borders closed to out-bound tourism.

Group online sales grew 55.2 per cent in the year, while its click and collect sales grew by more than 103 per cent. Online sales now make up 11.4 per cent of total sales.

Grayston said the uptake in online orders over the past few months had been huge, and growth in click and collect had outstripped online growth. It was because of this that the company was now looking at how it could repurpose its locations.

The group closed seven underperforming stores in the year. Grayston said not further closures plans were confirmed, but said it was continually assessing its store portfolio.

“We opened 105 fulfilment centres during the lockdown period to service customers (online), and it may become imperative to change the focus on stores and put more emphasis on click and collect,” he said.

“It is more of a question of how we use spaces, using stores for dark stores.”

Strong sales in the final quarter of FY20 had tailed off slightly in the start of FY21, although positive and ahead of sales in the first quarter of FY19.

Grayston said he was concerned about what another potential lockdown would mean for the business and the wider economy, and the impact of keeping the borders closed.

“We’re positioned cautiously for Christmas, we’ve taken a lot of risk out of the profile of the inventory, but who knows what will happen after the election, and especially going into next year. I’m very concerned that globally there will be a recession and we won’t be immune.

“Our customers are telling us they are starting to get very concerned about the future and they are cutting back their spending. There is concern in the outlook, that’s why we’re trying to be cautious and prepared.”

Headwinds aside, Grayston said the pandemic had “pressure-tested” the group’s business strategy and had validated its investment “in a digital future”.

“We feel like we’ve come through fire and that we’re in good shape.”

Wage subsidies, restructuring

The Warehouse Group has not considered repaying the $67.8m in received in wage subsidies despite the public backlash it has received both by the public and the Prime Minister – on multiple occasions.

Earlier this year, Prime Minister Jacinda Ardern said she was angry by the group’s decision to restructure and lay off up to 1000 staff. More recently, along with Judith Collins, she called its actions “immoral”.

But Grayston has defended the company’s decisions to claim the wage subsidy and to lay off hundreds of staff and cut back hours for others just months later.

He the group acted in good faith and without the subsidy hundreds of more staff would have been made redundant.

The restructuring plans (affecting staff mostly from the Red Shed business) had been planned for some time, and part of wider plans, before the onset of the Covid-19 pandemic, he said.

“The wage subsidy only covered 55 per cent of our wage bill – it’s not like we made fat profits and we pulled the dividend – we pulled a lot of rents and internal incentives, so there’s been pain all the way through. We used it as the government intended and we’ve had that confirmed to us.”

He had no comment to make when asked why he thought the group had received scrutiny in recent months, but said the group would work with government if were to “retrospectively make a decision to change the rules.

“There’s massive disruption going on in the industry, we’re seeing some big retail players such as JCPenney and Lord & Taylor, for example, go into bankruptcy. We employ 11,000 New Zealanders and serve most of the country and so these are changes we’ve had to make in order to continue to be here for good.”

The Warehouse says 2.3 million people visit its stores each week.

During lockdown, group sales reduced 67 per cent by $265m as its stores remained closed for seven weeks. More than 1.25 million orders were placed online during alert levels 4-2. It used 105 stores during that time as order fulfilment.

Last week the Warehouse announced it would not pay a dividend, this was despite it holding a net cash surplus of $168m. It had originally declared an interim dividend of 10 cents per share, but this was canned in light of “considerable uncertainty”.

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