The strong discounting would have some impact on The Warehouse group's second-half earnings, given about 25% of Red Shed revenue was exposed to apparel.
That sentiment had underpinned a 12% decline for the retail sector, with The Warehouse down 18% since May 10, compared with the NZX-50 down 5%.
Craigs had lifted its recommendation on The Warehouse shares to buy, based on valuation. The shares had a 12-month target price of $4.10. Shares last traded at $3.60 and had a 52-week trading range of between $4.39 to $2.51.
''We have increased confidence that management will be able to revive the Red Sheds and execute on its multichannel strategy, given a return to margin growth in the first half of 2013 and nine consecutive quarters of same-store sales growth.
''We like the speed at which The Warehouse is expanding into the online space while Noel Leeming provides leverage to optimise brand sourcing and improve brand perception at Red Sheds.''
The expanded group could also benefit from increased scale across sourcing, buying, logistics and marketing, Mr Timms said.
The group had an online presence in Torpedo7, Red Alert, and its own Warehouse brand. This week, it announced it had bought a 50% stake in Shop HQ, an online retail business operated by Shane Bradley, the founder of daily deal website GrabOne.
Mr Timms said The Warehouse remained an ''iconic Kiwi brand'' with a significant store footprint but over the past five years, a period of underinvestment and increasing competition, the company had seen the relevance of the group to the New Zealand retail scene at a significant crossroads.
Between 2009 and 2012, The Warehouse suffered a significant decline in operating margins and lost market share. As a result, the company was undertaking a significant capital expenditure programme on strategic initiatives, including store modernisation along with increased staff numbers and training - all elements which increased the cost base, Mr Timms said.
''This leads to the obvious question over the likelihood of this strategy being able to generate sufficient sales growth to drive operating leverage, or whether it is merely a defence measure. The latter will simply see sales remain flat and margins continue to decline on higher costs.''
The first half of 2013 did not provide a definitive answer but it did provide evidence of sales growth, market share and margin improvement, Mr Timms said.
Over the past six months, The Warehouse had displayed an obvious strategy to create a group of brands to benefit from its core competencies of sourcing and New Zealand scale.
It was also making a strong bid for a significant share of the online retail market in New Zealand.
Craigs believed the pace and scale of the group provided a competitive advantage, he said.
