The Warehouse Group Limited/Announcement

Supplementary Information on Full Year Guidance

Full Year Results8 March 2018WHSConsumer Discretionary

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_________________________________________________________________________________

To: Market Information Services Section
NZX Limited
_________________________________________________________________________________

Auckland, 8 March 2018 (Updated)

The Warehouse Group (NZX.WHS) Interim Results for the 26 weeks ended 28 January 2018
The Warehouse Group reports interim result above guidance range
The Warehouse Group today announced an Adjusted
1
Net Profit After Tax result of $37.7M for first six months of
the 2018 financial year, above the recent guidance range of $32-$35M.

The result was driven by a number of major changes in the business over the first half as part of the Group’s
transformation program.

The core Warehouse business had an encouraging result, proving that customers were responding positively to
the shift to every day low prices and change in product assortment. The core Warehouse (‘Red Sheds’) business
successfully transitioned its pricing strategy from Hi-Lo discounting to one of Every Day Low Pricing. The peak
trading period for the Red Sheds was encouraging given that change, with strong customer support for the new
product and price offer.

The Noel Leeming Group continued its strong growth in sales and earnings and the Torpedo7 Group reported sales
up 2.5% on the same period last year.

Group online sales in NZ were $117.4M, up 10.5% compared to the same period last year.

Gross profit of $522.5M at Group level increased by 0.7% compared to HY17.

Chair Joan Withers explained that the Group’s primary focus in the first half had been to relentlessly tade the peak
retail season, while also focusing on its ambitious transformation agenda.

“A key pillar of our strategy is to fix our retail fundamentals, which means driving major changes in the way we
operate the business, and how we delight our customers.”

“With a strong team now in place, and support from external experts, we are confident that we can successfully
execute our next major change agenda in 2018 to drive improved performance” said Ms Withers.

The Warehouse

The Red Sheds reported sales of $940.1M, which was down, as expected, from $975.1M in HY17 due to the
transition in pricing and product strategy resulting in a reduction in average selling price.

That reduction has been offset at a Gross Profit level by a reduction in clearance and promotional markdown. It is
expected that the net cash gross profit percentage will improve and more than offset the decline in average selling
price now that the clearance of discontinued ranges has been completed.

EBIT for the Red Sheds was down (17.6%) compared to the same period last year, reflecting increased logistics
costs for overall higher unit volumes, and employee cost increases. Same store sales decreased (3.6)% in the half,
an improvement over the Q1 result of (5.2)%.

Notwithstanding the absolute decline year on year in profit generated from the Red Sheds division, overall the first
half performance has been encouraging given the degree of change that has been absorbed by the business.

Noel Leeming

Noel Leeming reported sales of $453.9M for HY18, a 7.5% increase on the same period last year and same store
sales increased by 5.1% in the half.

Cellular and portable audio were standout categories for Noel Leeming for the half, and the business saw gains
across all but the TV product categories, which was on-par with last year.

Operating profit for the half was $15.3M, an increase of $6.1M or 65.7% on HY17. The operating profit result was
helped by a $2.7M non-recurring item, being a change in accounting treatment of supplier funded store fixtures.

Torpedo 7 Group

Torpedo7 Group reported sales of $88.6M for HY18, up 2.5% on the HY17.

Operating profit of $0.8M decreased by (68.0)% over the same period last year. Clearance of aged stock and
changes in product mix have impacted margins, and efforts to increase brand awareness for the offline retail have
driven some cost expansion.

During the period a number of legacy issues were tackled including addressing inventory and sales issues within
the Number One fitness and Shotgun supplements divisions.

After strong growth in FY17, the daily deals site 1-day saw flat sales growth.

Warehouse Stationery

Blue Sheds reported sales of $129.0M for HY18, a decrease of (7.1%) or $9.8M compared to the same period last
year.

The stationery business started to recover towards the end of the half year as it entered the key Back-to-School
trading period.

Operating profit of $3.7M decreased by 43.4% over the same period last year.

The operational integration of Warehouse Stationery (Blue sheds) into the Red Sheds caused a number of internal
systems and process challenges, which when coupled with a softer trading performance in key categories, saw a
sharp decline in performance for Blue.

The return to more normal performance levels is a key focus for what has been historically a very strong performer
for the Group.

Outlook

Subject to any material shifts in anticipated trading conditions, the board expects sales for the second half year to
be at a similar level to that of H217. Adjusted Net Profit After Tax for the year is expected to be between $50.0M
and $53.0M, representing approximately a 22% to 27% profit decline year on year.

The Board has announced a 10 cents per share interim dividend. The final dividend will be announced at the full
year, as the Board is planning to review the Group’s dividend policy, following the sale last year of the Financial
Services business.

Key interim facts

 Adjusted
1
Net Profit After Tax result of $37.7M
 Gross profit of $522.5M
 Net profit after tax of $35.5M
 Group retail sales for the period were $1,598.1M
 Costs of doing business of $464.1M

ENDS

Background: The Warehouse Group Limited

The Warehouse Group Limited comprises 93 Warehouse stores, 74 Noel Leeming stores. 5 Lifestyle Appliance stores, 70 Warehouse
Stationery stores and 11 Torpedo7 stores in New Zealand and several online businesses. The company had turnover of $3.0 billion
in FY17 and employs over 12,000 people.

Contact details regarding this announcement:

Media: Julia Morton, Head of PR and Media, +64 21 875 388

Investors and Analysts: Mark Yeoman, Group Chief Financial Officer

To be contacted via Kim Russell +64 9 488 3285 or +64 21 452 860

1
A reconciliation of adjusted net profit to reported net profit is detailed on page 4 of the NZX release and in note 4 of the interim financial
statements. Certain transactions such as any profits or losses from the disposal of properties, goodwill impairment, direct costs and adjustments
relating to business acquisitions or disposals and costs connected with restructuring the Group can make the comparisons of profits between
periods difficult. The Group monitors adjusted net profit as a key indicator of performance and uses it as the basis for determining dividends and
believe it helps investors to understand how the underlying business in performing.

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THE WAREHOUSE GROUPLIMITED
FY18INTERIMRESULT
THURSDAY, 8MARCH 2018 Updated

Chair’s Introduction
The first half year has seen the start of a major Transformation across The Warehouse Group. Notable achievements in
the first half include the change in pricing strategy in our core Warehouse ‘Red Sheds’ business from hi-lo to EDLP, and
the operational integration of Warehouse Stationery (‘Blue’) with The Warehouse, and Torpedo7 with Noel Leeming.
Consequently our financial results have been directly affected by these changes, however our second quarter results
improved on our first quarter performance, and that trend is continuing into the second half.
The Group is reporting an adjusted Net Profit After Tax of $37.7M which is above the guidance range issued on 11
January 2018, and represents a (16.4)% reduction compared to the comparable period last year (in that comparison we
have excluded the results of the discontinued Financial Services operations).
In our guidance in January we highlighted an accrual for expected remuneration incentives across the business as a
material point of difference to last year. Incentives are a normal part of our remuneration structures, and only
periodically pay out based on business performance. At the start of the financial year we set targets in an environment
of major change, and incentivised milestone achievements and behaviours that align to long term shareholder value. If
we backed out all remuneration incentives from the first half numbers for this year and last year, the difference in
underlying performance is (1.7)%.
We updated the market in November on our strategy and planned transformation. The November/December/January
quarter is our peak trading period so no major new initiatives were launched in that second quarter as the business was
focused on trading the peak season. As we enter the second half, work is commencing on the next set of change
initiatives.
The business is executing on its change agenda and the Board is encouraged by the first half results, with the decline in
financial performance from these changes to date being less severe than we have seen in other retailers who have
shifted to an EDLP strategy.

The Warehouse Group H1 18 Interim Result
Retail sales were down 0.9% on last
year. Declines in Red, driven by a
change in pricing strategy, and Blue
which dealt with headwinds caused by
the internal change programme and
softer trading. Offsetting these were
strong growth in Noel Leeming and
growth in Torpedo7 sales.
A 0.7% increase in Gross Profit dollars is
driven by Noel Leeming, offset by margin
erosion in Red relating to the shift to
EDLP pricing strategy, and
underperformance in Blue.
CODB increased in the half as the
business increased its capabilities in
Information Systems teams, and
strengthened its executive and senior
management in readiness for the
Transformation.
The H117 numbers have been restated
to adjust for the classification of the sold
financial services business as a
discontinued operation.
Adjusted NPAT has been delivered
above the range signalled to the market
on 10 January, at $37.7M which is
(16.4)% down on last year.
A first half result influenced by major changes occurring in the business as the Group executes against its
Transformation plan. Noel Leeming is a bright spot amongst a backdrop of challenging performances, some
expected and some unexpected, particularly in the Blue Sheds.
$ MH1 18 H1 17Variance
Retail Sales1,598.11,611.9-0.9%
Gross Profit522.5519.0+0.7%
Gross Margin32.7%32.2%+50bps
CODB464.16449.1+3.3%
CODB29.0%27.9%+110bps
Retail Operating Profit58.469.9-16.5%
Operating Margin3.7%4.3%-60bps
NPAT (Reported)35.341.6-15.1%
NPAT (Adjusted)37.745.0-16.4%
Operating Cash Flow46.678.5-40.6%
Ordinary Dividend10.0cps10.0cps0.0cps
THE WAREHOUSE GROUP
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3

Adjusted vs Reported Results
The Group adjusts reported profit for unusual and non-operating items. Unusual items include any
gains or losses from the sale of assets, adjustments in carrying values of assets, business
acquisitions or disposals and restructuring costs.
$M
EBITNPAT
H1 18H1 17H1 18H1 17
Adjusted Earnings
58.469.937.745.0
Restructure
(3.2)(3.9)(2.4)(2.9)
Property Divestments
-(0.8)-(0.6)
Deferred Tax Adjustment
(resulting from property divestments)
-0.1
Reported Earnings
55.265.235.341.6
Discontinued
(3.5)(28.0)
Attributable to Shareholders
31.813.6
THE WAREHOUSE GROUP
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4

Balance Sheet
The reduction in working capital year
on year relates to timing differences in
debtors and creditor payments versus
balance date, and the removal of
Finance Receivables following the
sale of the Financial Services
business in H118.
Held for sale assets include the Lunn
Avenue site, for which we are in a due
diligence phase for development of
that site. Last year the Newmarket
site was included as available for sale
and was subsequently sold in July
2017.
Tax assets are higher largely due to
the reversal of deferred tax liabilities
connected with the property sales.
Net Debt is lower by $94M, due to
receipt from the sale of Newmarket,
and timing of cash flows, resulting in a
steadily reducing gearing level.
Equity is lower than last year, due to
the write down of the financial
services business, rather than
dividends which are based around
retail profits.
$MH1 18H1 17Variance
Inventory
Finance Receivables
Trade & other
Receivables
Trade & other Payables
Provisions
540.3
-
75.4
(291.3)
(78.5)
540.5
74.7
80.4
(329.1)
(68.3)
-0.2M
-74.7M
-5.0M
+37.8M
-10.2M
Working Capital
245.9298.2-52.3M
Fixed Assets
Held for Sale
271.4
16.2
297.1
52.3
-25.7M
-36.1M
Funds Employed
533.5647.5-114.1M
Tax Assets
Derivatives
Goodwill and brands
44.5
(12.6)
106.6
41.2
(10.7)
106.6
+3.3M
-1.9M
0M
Capital Employed
672.0784.7
-112.7M
Shareholders’ Equity
Minority Interests
Net Debt
501.8
1.0
169.2
521.2
0.2
263.3
-19.4M
+0.8M
-94.1M
Source of Funds
672.0784.7
-112.7M
Gearing
25.2%33.6%
Balance Sheet gearing is improving and is at appropriate levels.
THE WAREHOUSE GROUP
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5

6
Cash Flow
The movement year on year in
operating cash flows is largely a
result of the timing of creditor
payments (part of working capital).
Proceeds from Divestments
include the proceeds from the sale
of the Financial Services business
which settled after the FY17
balance date.
Retail capital expenditure
continues to track at levels that are
in line with depreciation.
The business remains cash generative, and we continue to focus on improving the gearing
ratio and improving our management of working capital.
$MH1 18H1 17Variance
Trading EBITDA
87.399.0
-11.7M
Working Capital
Taxes Paid
Interest Paid
Other Items
(15.0)
(12.2)
(5.9)
(7.6)
14.7
(20.1)
(8.3)
(6.8)
-29.7M
+7.9M
+2.4M
-0.8M
Operating Cash Flow
46.678.5
-31.9M
Capital Expenditure
Divestments
Securitised debt sold
Dividends Received
Dividends Paid
Other
(38.9)
17.4
45.2
0.1
(20.9)
(0.4)
(38.4)
14.8
-
0.1
(17.5)
(0.8)
-0.5M
+2.6M
+45.2M
-
-3.4M
+0.4M
Net Cash Flow
49.136.7
+12.4M
Opening Net Debt
Closing Net Debt
(218.3)
(169.2)
(300.0)
(263.3)
THE WAREHOUSE GROUP
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6

—
The WarehouseGroup

FY18INTERIM RESULT

—
A period dominated by
our accelerated transition
to EDLP pricing,
Customer reaction
positive with growth in
transactions and volume
of product sold
THE WAREHOUSE GROUP
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9

The Warehouse –2018 Interim Result
Same Store Sales decreased by
3.7% in H1. The decrease in Q2
was 3.5%.
The reduction in Sales revenue
was an anticipated effect from the
transition to EDLP. Unit Volume of
product sold increased by 6.7%.
Gross margin percentage reduced
slightly as we invested in price as
part of our transition to EDLP and
completed clearance of
discontinued ranges.
Sales deleverage resulted in CODB
increasing by 60 bps. In dollar
terms a reduction of $5 million
reflecting progress in delivering a
simpler business.
CAPEX includes a number of
technology projects together with
the relocation of one store.
10
$MH1 18H1 17Variance
Sales
940.1975.1
-3.6%
Same Store
Sales
-3.7%+1.3%
-500bps
Gross Profit
339.2354.7
-4.4%
Gross Margin
36.1%36.4%
-30bps
CODB
290.2295.2
-1.7%
CODB
30.9%30.3%
+60bps
Operating Profit
49.059.5
-17.6%
Operating Margin
5.2%6.1%
-90bps
Capital Expenditure
19.318.3
+1.0M
Stores
9392
+1
Reduction in Operating Margin as the business managed one-off clearance of discontinued
stock lines as part of its EDLP transition.
THE WAREHOUSE GROUP

10

—
Sales
Apparel continued to perform strongly with Sales and margin both increasing. Customers have
reacted positively to our curated assortment and our pricing.
With the warmer summer weather this year Seasonal categories have performed well with Water
Sports and Pools, Cooling and Outdoor Furniture leading the way.
Unit growth has been particularly strong in Grocery, with our Confectionery and Health & Beauty
categories performing ahead of expectations. Our dollar deals with specific dollar price points
have contributed to this result.
Gross Profit
Gross Profit declined $15.5M in the half as we invested in price and continued our clearance of
discontinued lines. This was particularly apparent in our Home and Leisure departments. In
Apparel our margins continued to improve.
CODB
Focus throughout the half on cost reduction, however CODB leverage is challenging with
declining Sales during the half. Productivity and developing a simpler business continues to be
a focus.
11
The Warehouse –2018 Interim Highlights
Key Categories performing well, reflecting better range selection and solid trading plans.
THE WAREHOUSE GROUP

11

—
Stores
In the period we relocated our Rolleston store to a new larger site. We also opened a
Clearance site at Balmoral, Auckland.
Focus
With the transition to EDLP largely complete we are continuing to focus on price elasticity
with a view to improving gross margins. Completion of the one-off clearance of discontinued
products will take place in H2.
Further reduction in CODB is expected in H2 as we continue to remove complexity from our
operating model.
12
The Warehouse –2018 Interim Highlights
Continued emphasis on reshaping our Operating Model for sustainable profitability.
THE WAREHOUSE GROUP
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12

FY18 INTERIM RESULT

—
Warehouse Stationery
operating profit
impacted by one-off
integration complexity
THE WAREHOUSE GROUP
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14

Significant one off impact to the business from integration to Red systems
Warehouse Stationery –2018 Interim Result
Significant sales impact from softer
performance in communications
and technology segments and one-
off impact of the integration of Blue
sheds business onto core Red
sheds systems.
Number of transactions similar to
last year but reduction in average
sale price due to higher value
category performance.
Improved trend in Back to School
trading.
Margin percentage increased 50
bps reflecting reduced mix of
technology.
Increase in CODB percentage as a
result of sales deleverage and high
level of fixed cost. Emphasis
placed on maintaining service
levels.
We opened two new stores in Q4
F17 in Haweraand Johnsonville,
Wellington. We opened a Store
within a Store in Rolleston in Q2
this half (as part of our Red shed
store).
15
$MH1 18H1 17Variance
Sales
129.0138.8
-7.1%
Same Store Sales
-7.9%+1.2%
-910bps
Gross Profit
51.354.5
-5.9%
Gross Margin
39.8%39.3%
+50bps
CODB
47.648.0
-0.9%
CODB %
37.0%34.6%
+240bps
Operating Profit
3.76.5
-43.4%
Operating Margin
2.8%4.7%
-190bps
Capital Expenditure
0.41.4
-1.0M
Stores
7067
+3
THE WAREHOUSE GROUP
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15

FY18 INTERIM RESULT

—
Another strong
performance from Noel
Leeming resulting in year
on year operating profit
growth of 66%
THE WAREHOUSE GROUP
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17

Noel Leeming Group –2018 Interim Result
A significant increase in Operating Profit, with continued focus on providing end to end service
for our customers through our Passionate Experts.
Strong sales results in H1
resulted in sales growth of 7.5%
with SSS +5.1%.
Key growth came from the
Cellular and Audio categories.
Gross Profit was $13.2m up on
H1 17. This was as a result of
the increase in sales volumes
and an improved GP% of 150bps
driven by category mix and
promotional activity.
One-off adjustment in the
treatment of supplier funded
rebates for store fixtures results
in an additional $2.7m into GP.
Strong Operating Profit of
$15.3m up $6.1m, 65.7% on
H1 17.
During H1 17 we opened two
new stores, being Royal Oak,
Auckland and Rolleston,
Christchurch. In addition, we
relocated our Northwood,
Christchurch site and extended
our Taupostore.
18
$MH1 18H1 17Variance
Sales
453.9422.1
+7.5%
Same Store Sales
+5.1%+9.9%
-480bps
Gross Profit
99.986.7
+15.3%
Gross Margin
22.0%20.5%
+150bps
CODB
84.677.5
+9.3%
CODB
18.6%18.3%
+30bps
Operating Profit
15.39.2
+65.7%
Operating Margin
3.4%2.2%
+120bps
Capital Expenditure
8.47.0
+1.4M
Stores
7977
+2
THE WAREHOUSE GROUP

18

FY18 INTERIM RESULT

—
Torpedo7 Group sales
grew 2.5% with strong
growth coming fromthe
Torpedo7 retail stores
THE WAREHOUSE GROUP
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20

21
Torpedo7 Group –2018 Interim Result
Strong sales growth in New
Zealand, led from the Torpedo7
retail stores (same store sales bricks
& mortar up 12.2%).
T7 online NZ continues to grow,
partially offsetting decline in the
Australian online business.
1-day’s sales have flattened out
after strong growth last year.
Key sales growth has come from the
Bike and Water categories.
Product mix and clearance of aged
inventory have impacted GP%, this
has resulted in GP$’s flat on H1 17.
CODB increase highlights
investment in brand awareness and
stores, this has resulted in an
Operating Profit of $0.8m.
In the period we closed the Number
1 Fitness store at Penrose and
relocated to be within the existing
Torpedo7 store at Mt Wellington,
Auckland. In addition we have been
operating two pop-up stores
(Westgate, Auckland and
Remarkables, Queenstown).
A challenging first half for Torpedo7 Group
$MH1 18 H1 17Variance
Sales88.686.4+2.5%
Gross Profit21.021.00%
Gross Margin23.7%24.3%-60bps
CODB20.218.69.0%
CODB22.8%21.5%+130bps
Operating Profit0.82.4-68.0%
Operating Margin0.9%2.8%-190bps
Capital Expenditure0.50.2+0.3M
Stores1112-1
THE WAREHOUSE GROUP
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21

—
The WarehouseGroup

—
Key strategic Initiatives
—
While the second quarter was time for us to focus on trading, some key strategic initiatives were
advanced in the first half.
Move to EDLP in Red
All categories transitioned to EDLP by the end of Q1 with exceptions for whiteware and fine
jewellery.
Range curationongoing and SKUcount for H2 is better thantarget.
Private label curated to 32 brands from ~80 at end of FY17 and transition underway.
Childrenswear, the first category to transition to EDLP in FY17 H2, continues to show positive
sales on top of last year’s gains. H1 sales up 4.8% whilst clearance burn and promotional
investment both reduced.
Dynamic Buying and Sourcing
We continue to lower cost of goods sold through sourcing direct ($6.5m YTD).
India office operational with significant growth from South East Asia and more than 50 new
suppliers on-boarded.
Merchandise team restructured and new sourcing roles added to create a fully cross functional
product team. Design and Quality teams continue to grow and are now embedded as part of
the wider product team.
First phase of sourcing systemimplemented providing a cross functional critical path for the
combined product team. (Rolling implementation as new orders are placed).
Private label products delivering 16 point margin advantage over national brands (vs LY).
THE WAREHOUSE GROUP
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23

—
Key strategic Initiatives (cont)
—
Marketing
Reduction in promotional intensity driven by move to EDLP.
Channel mix and message optimisation continuing.
Increased focus on data driven marketing and personalisation.
RFP for Media planning and buying in progress. The planistounify our media planning and
buying behaviours with a single fully-integrated, tech-enabled partner for the entire business.
Marketing team restructure to drive innovation and efficiency in progress under our new
Group CMO, Jonathan Waecker.
Education
Test for Purple School carried out during 6 weeks of Back to School period.
Post implementation review underway and next steps to be determined but lots of clear
positives.
Fulfilment & Logistics
ChrisFoord hired as Chief Logistics Officer, bringing experience of large scale
transformation from his time at Fonterra.
THE WAREHOUSE GROUP

24

—
Transformation Update
—
H2 will see the majority of the Transformation initiatives intensify. Areas of
opportunity have been identified and bottom up analysis and validation will begin at
pace mid March.
We see that most of the Transformation projects not already executed will impact
FY19 far more than the second half of FY18. We do expect some incremental costs
as the Transformation progresses.
We have appointed a new Chief Transformation Officer to drive the programme of
work, Scott Newton, who has relevant NZ based Transformation project experience.
We remain committed to last year’s three year goals of ~7% EBIT.
THE WAREHOUSE GROUP

25

—
The WarehouseGroup

—
Outlook & Full Year Earnings Guidance
—
Retail Environment
Retail conditions remain generally favourable, despite increasing competitive activity.
Headwinds for H2 18 remain increased competition.
Transformation
The second quarter is always a peak trading period for the business. The second half
will focus on accelerating our transformation initiatives.
Full Year Guidance
Sales for H2 18 are expected to be similar to H2 17. The FY18 Adjusted Net Profit
After Tax subject to material changes in trading conditions is expected to be in the
range of $50M to $53M. This represents a decrease of 22-27% in profit for the full
year.
Today the Board has declared an interim dividend of 10cps payable on 12 April 2018.
THE WAREHOUSE GROUP

27

THE WAREHOUSE GROUP
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28

The Warehouse Group Interim Result Announcement The Warehouse Group Interim Report

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