Red Shed retailer The Warehouse Group's trading update was well received by the market but the group needed to show a trend that was not two steps back and one forward, Craigs Investment Partners broker Chris Timms said.
The Warehouse had now produced a strong second-half 2015 and first-half 2016 results but those were cycling weak comparable periods.
"We have been positive on the strategic direction of the group, including online, Torpedo7 and financial services. But evidence of consistent sales growth and margin expansion is required before we can return to a positive investment thesis.''
It was likely the Warehouse board would remain cautious on guidance.
There was a possibility the momentum was stronger in the business than guidance implied.
Craigs would wait until the second-half 2016 results to assess that, he said.
The Warehouse said in a statement to the NZX adjusted net profit after tax for the group for the first half of the financial year ending on January 31 was expected to between $43million and $45million, between 15% and 21% higher than the previous corresponding period.
Strong first-half sales and profit performances had been recorded across the group for all of its retail brands.
The Warehouse chairman Ted van Arkel said the ongoing execution of the group's strategy had resulted in both sales and margin growth, with improved seasonal management and strong Christmas trading.
There has also been good cost control as the business moved past the strategic cycle of investment catch-up undertaken over the last four years.
The retail growth had been tempered at a group level by the previously anticipated start-up losses in the new financial services business, which would continue until it established scale, he said.
Full-year profit guidance would be given at the release of the half-year results on March 11.
"We now expect full-year profit to be up on last year, although not to the same extent as these first half results, given the potential risks around the impact of foreign exchange movement on margin, the impact of the 53rd week in 2015 and that financial services is in a loss-making establishment phase of its business.''
Craigs' current 2016 financial year estimate was adjusted net profit of $58million, up 2% year-on-year.
If the Warehouse achieved between $43million and $45million in the first half, that implied a second-half profit of $13million to $15million, compared with $20million in 2015 and $14.5million in 2014, Mr Timms said.
Forsyth Barr retained an underperform rating on The Warehouse and broker Suzanne Kinnaird said the group faced potential problems in the second half of the financial year.
Full-year profit growth was expected to be more modest than in the first half.
"The Warehouse is considerably different from three years ago, following a suite of acquisitions and new strategic priorities. Execution risk remains around its new ventures with the earnings potential unproven.''
Its core Red Sheds chain had yet to deliver a sustained turnaround in profitability, despite substantial capital investment, she said.
At a glance
• First-half profit expected to be 15% to 21% higher than pcp
• Evidence of consistent sales growth sought by brokers
• Red Sheds yet to deliver profit turnaround
• Full-year profit guidance to be delivered on March 11
