Reduce recommendation on Warehouse shares

Forsyth Barr has downgraded The Warehouse shares to reduce following the retailer's acquisition this week of the Noel Leeming Group for $65 million.

The sharebroking firm has lowered its share target price to $2.90.

The Warehouse traded just above $3 yesterday with more than 175,000 shares changing hands.

Noel Leeming includes Bond and Bond stores, a total of 92 outlets throughout New Zealand.

Forsyth Barr broker Tom Bliss said that notwithstanding the earnings per share accretion, and the relatively small size of the deal, the strategic rationale was questioned.

The consumer electronics sector is intensely competitive and characterised by low margins and price deflation,'' he said.

We question the attractiveness of the acquisition given the unfavourable market dynamics.

The Warehouse had struggled to date to compete effectively in the consumer electronics segment through the Red Sheds, Mr Bliss said. This in part reflected the intensely competitive nature of the category which was led by specialty retailers.

While in theory the acquisition might give the Red Sheds greater access to brands, in practice that was unlikely to happen, he said.

The Warehouse Group had started a major five-year strategic plan of reinvestment and revitalisation to arrest market share falls at its flagship chain. That followed a change in management.

"While we are encouraged by the early positive signs, we believe investors are likely to remain cautious until evidence of improving profitability begins to emerge,'' Mr Bliss said.


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