Warehouse Group Ltd (The) (NZSE:WHS) (FY 2026) Earnings Call Highlights: Profit Surges to $22. ...

Negative Points

• Reported sales declined 1.9% to just over $3 billion, reflecting a challenging retail environment.

• No final dividend declared for FY26, as the Board prioritizes rebuilding earnings and retaining financial flexibility.

• The Warehouse brand still reported an operating loss of $7.5 million, and profitability remains below acceptable levels.

• Employee promoter score declined, reflecting the significant change and pressure on staff during the turnaround.

• Noel Leeming sales were down 0.5% on a same-store basis, and the brand faces intense competition and market share pressure.

Q & A Highlights

Q: Can you provide more detail on what drove the sharp lift in gross margin at The Warehouse (Red Sheds) through the fourth quarter, and where do you think margins can get to for that business if foot traffic and sales remain broadly flat in FY27? A: Mark Stirton (Group CEO) attributed the Q4 margin recovery to a combination of factors, led by home and apparel higher-margin categories that had been suppressed by a long period of clearing distressed inventory at heavily discounted prices. He noted the 38% figure referenced was a post-COVID 2022 peak, when grocery mix was also lower than today. The grocery range has since been repositioned as a value-led top-up shop, removing long-tail product that hurt margins. He said getting the major contributing categories back to historic margins is "within our grasp," driven by better buying and selling more full-price items with less discounting, but declined to give a specific FY27 margin uplift steer.

Q: How confident are you that the second-half gross margin uplift at The Warehouse can be held if you grow the top-line, or do you have to give up price to get sales moving again? A: Mark Stirton (Group CEO) said sales are a function of the quality of sales, and not all historic sales volume was the shape the business wanted. He noted Q3 was tough for every retailer after the January fuel crisis and interest rate pressure, with consumer confidence falling off a cliff before recovering in Q4. He said the group has held sales broadly flat while seeing the benefit of selling more full-price items, with margin expansion running slightly ahead. John Journee (Chair) added that the shape of the business is changing toward the core Warehouse customer in home, apparel and beauty, which naturally improves margin mix.

Q: Cash flow was strong this year, largely from inventory work, with stock turns at 4.7 times. How does that improve next year, and do you have a target for inventory given how powerful a cash generator it can be? A: Steph Knight (Group CFO) said the group was pleased with cash generation and the resulting reduction in debt, noting average debt levels across the year were also significantly lower. She said future improvement comes first from trading, and there is further opportunity to reduce inventory, with 21% of stock still over six months aged being too high. Mark Stirton (Group CEO) illustrated the potential, noting that cutting aged inventory from 21% to 5% would lift stock turns to around 5.5 times and release significant cash, though the first tranche came out quickly and the second will be slower. He added the group took extra provisions to clear genuinely distressed stock.

Q: Do you think getting cost of doing business below 31% of sales is possible in FY27, or is it still a medium-term target? A: Steph Knight (Group CFO) said below 31% is probably still a medium-term aspiration. In a highly inflationary environment, the goal is for costs to grow more slowly than inflation and more slowly than expected sales growth, so the group continues to improve. She said there is still plenty of opportunity, but the uncertain environment and inflationary cost pressures will have some impact.

Q: Noel Leeming sales are down about 10% versus five years ago and appear to be losing share to JB Hi-Fi and PBTech. What initiatives are in place to grow the top-line and maintain market share? A: Mark Stirton (Group CEO) acknowledged JB Hi-Fi as a strong competitor opening many stores in a flat market. He said Noel Leeming will invest more in its store environment, citing the Queen Street store's younger, more contemporary look and feel aimed at attracting under-35s, a key customer group. He sees opportunity in smaller audio-type categories where the brand is underweight, alongside its strength in big-ticket items, and said the group will start opening more stores to support top-line growth and share. John Journee (Chair) added that the intent to return to store growth is there, balanced against finding the right sites and managing economics, but specific detail cannot be shared.

Q: What should investors expect from the November Investor Day medium-term financial targets and a clear framework, or just strategy? A: Steph Knight (Group CFO) said the group has spent the last six months working with the board to refresh the strategy. The first part will cover how the group will win in stores, supported by digital experience, laid out across the three brands. There will also be longer-term financial aspirations and detail on capital structure. She said it will be a meaningful update giving investors greater clarity on what to expect over the next three to four years, while keeping some detail back.

Q: What does the underlying exit cost base into FY27 look like, given the $29.8 million reduction included the extra FY25 week and one-off TCS timing benefits? A: Steph Knight (Group CFO) said the 53rd week impact was in the vicinity of $15 million to $16 million, and there was a one-off gain from the TCS co-source model around mismatched timing of people leaving the organization and work moving across, which will not repeat. She said the group expects cost of doing business to grow in a high-inflation environment, but more slowly than inflation, with some changes not yet fully benefiting FY26 and delivering further benefit into FY27.

Q: When you think about the medium to long-term capital structure, do you want the business to be in net cash before bringing back dividends, or is there still a place for debt? A: Steph Knight (Group CFO) said capital structure is ultimately a board decision, with further detail to come at the Investor Day. She said the group is much more comfortable with debt at lower levels like now, and noted retail peers commonly sit at negligible debt or slightly net cash, using funding mainly for working capital facilities. Those are the considerations being worked through.

Q: CapEx was down significantly this year can you give any read on where it lands in FY27? A: Steph Knight (Group CFO) said CapEx has been deliberately low for the last two years while the strategy was refreshed and the business refocused on the turnaround. More spend is now going toward stores. She said CapEx levels will be higher ahead, though still below the long-run average and not back to FY21FY23 levels, with the balance of investment still heavily weighted toward stores.

Q: Can you give a steer on the three-to-five-year runway for Noel Leeming store openings? A: Mark Stir

For the complete transcript of the earnings call, please refer to the full earnings call transcript .