10/18/07 9:06:13 AM 25 YEARS THE WAREHOUSE GROUP LIMITED // ANNUAL REPORT 2007 ANNUAL REPORT GROUP LIMITED // THE WAREHOUSE THE WAREHOUSE GROUP LIMITED // ANNUAL REPORT 2007 WAR008 cover f.indd 1 The Warehouse Group is one of New Zealand’s largest retailers, achieving sales in New Zealand of $NZ1.76 billion, and profit of $NZ115.5 million for the year ended 29 July 2007. THE WAREHOUSE GROUP COMPRISES 85 WAREHOUSE NEW ZEALAND STORES AND 43 WAREHOUSE STATIONERY STORES, AND EMPLOYS MORE THAN 8,000 TEAM MEMBERS. FINANCIAL CALENDAR HALF YEAR FULL YEAR Balance date 27 January 2008 27 July 2008 Results announced March 2008 September 2008 Reports published/dividends paid April 2008 October/November 2008 Quarterly sales announced November 2007 March 2008 May 2008 September 2008 Annual Meeting The Annual Meeting of shareholders of the Company will be held in the Guineas Ballroom, Ellerslie Event Centre, 80-100 Ascot Avenue, Greenlane East, Auckland, New Zealand on Friday, 30 November 2007 commencing at 10.00am. The Annual Report is dated 12 October 2007 and is signed on behalf of the Board by: Keith Smith Ian Morrice Chairman Managing Director Highlights Top-line growth Positive same Strong Sales from continuing businesses up store sales growth balance sheet 2.4% to $1.76 billion The Warehouse NZ same store sales up Continued improvement in key balance by 2.0% sheet and leverage ratios $115.5 million Warehouse Stationery same store sales up by 2.2% Profit attributable to shareholders, 37.4 cents compared to $29.3 million in F06 Earnings per share up 27.8 cents to Investment 37.4 cents per share $97.9 million continues Net profit after tax excluding divestment Stores upgraded, systems infrastructure 17.5 cents of the Australian business and The Base and supply chain strengthened Ordinary dividend increased by 1.5 cents per share to 17.5 cents per share Year of Special divided of 35.0 cents per share paid Consolidation Warehouse Stationery poised for growth Celebrating 25 Years // Page 1 Page 2 Our Core Purpose The Warehouse will make a difference to people’s lives by making the desirable affordable and supporting New Zealand’s communities and the environment. By putting the customer first, we will succeed. Everything we do flows from this principle. We enjoy success through working together as one team. People choose to work for us because we care about and recognise individuals. Celebrating 25 Years // Page 3 06 Results at a Glance 23 New Brands 42 CFO’s Report 08 Chairman’s Report 24 Apparel 44 Financial Information Managing 10 Director’s Report 26 Supplier Awards 71 Corporate Governance 12 Board of Directors 28 Warehouse Stationery 78 Directors’ Interests 14 Celebrating 25 Years 32 Systems 79 Statutory Disclosures 17 The Warehouse NZ 35 Charities and Fundraising 85 Directory 20 Our People 38 10 Year Review Page 4 CELEBRATING 25 YEARS See Page 14 > OUR PEOPLE See Page 20 > SYSTEMS See Page 32 > Celebrating 25 Years // Page 5 2007 2006 $000 $000 CHANGE NOTE Continuing operations Sales 1,761,677 1,720,479 2.4% A EBITDA 188,460 183,492 2.7% B Operating profit 153,051 152,044 0.7% C Unusal items (Loss) / Gain on property disposals (542) 1,591 n.m Gain on disposal of ‘The Base’ Te Rapa Limited joint venture 17,432 – n.m D Gain/(loss) on divestment of the business assets of The Warehouse Australia 5,939 (88,801) n.m E Group results Earnings before interest and taxation 175,880 65,868 167.0% Net interest expense (6,467) (10,127) -36.1% F Income tax expense (53,637) (26,165) 105.0% Minority Interests (302) (259) 16.6% Net surplus attributable to shareholders 115,474 29,317 293.9% Adjusted net earnings 1 97,856 96,190 1.7% G 1 Adjusted for the divestment of the Te Rapa joint venture and Australian operations A. SALES – Sales from continuing operations increased 2.4 percent. D. GAIN ON DISPOSAL OF ‘THE BASE’ TE RAPA LIMITED JOINT VENTURE The Warehouse NZ sales rose 2.6 percent, and same store sales The group sold its 50% joint venture interest in ‘The Base’ Te Rapa increased by 2.0 percent. Warehouse Stationery sales rose 0.9 percent, retail complex to its joint venture partner, Tainui Group Holdings Limited and same store sales increased by 2.2 percent. in July 2007. B. EBITDA – EBITDA from continuing operations rose 2.7 percent, with E. DIVESTMENT OF THE BUSINESS ASSETS OF THE WAREHOUSE AUSTRALIA The Warehouse NZ recording a 4.3 percent increase and Warehouse The group sold the business assets of The Warehouse Australia in Stationery a 2.8 percent increase. November 2005. The sale was subject to a number of warranties. Some warranty obligations were settled during 2007 allowing surplus provisions C. OPERATING PROFIT Operating profit from continuing operations to be released. increased 0.7 percent. The Warehouse NZ and Warehouse Stationery had increases of 2.6 percent and 2.2 percent respectively. The operating F. NET INTEREST EXPENSE – Lower net interest expense reflects margin decreased 10 basis point from 8.8 percent to 8.7 percent. The a reduction of $72.4 million in net debt. operating margin was adversely impacted by an increase in group costs related to the group’s long term incentive plan, and a reduction in the G. ADJUSTED NET EARNINGS – Net profit after tax excluding the contribution from financial services. divestment of Te Rapa and the Australian operations increased 1.7 percent which represented a solid trading result given difficult trading conditions. SALES – CONTINUING EBITDA – CONTINUING BUSINESSES (NZ $M) BUSINESSES (NZ $M) 2,000 220 16.0% 1,800 14.0% 1,600 170 1,400 12.0% 1,200 120 10.0% 1,000 800 8.0% 600 70 6.0% 400 4.0% 200 20 0 EBITDA MARGIN 2.0% EBITDA MARGIN CONTINUING BUSINESSES 01 02 03 04 05 06 07 01 02 03 04 05 06 07 Page 6 Fundamental improvements to our cashflows, debt levels and interest costs have improved the quality of our earnings and represent significant progress in our plans to re-invest in the business. 2007 2006 NOTE Inventory including goods in transit ($m) 254.8 247.5 A Net debt ($m) 43.0 115.4 B Gearing (net debt/net debt + equity) 9.4% 25.7% C Interest cover (EBIT/Net interest) 1 23.6 15.3 Fixed charge cover (EBITDA + rent)/(net interest + rent) 2 4.0 3.9 Cash realisation ratio (NCFO / NPAT + D + A) 1 0.97 1.15 D Net debt to EBITDA 0.23 0.61 1 Adjusted for the divestment of the Te Rapa joint venture and Australian operations 2 Continuing operations A. INVENTORY INCLUDING GOODS IN TRANSIT – Inventory including goods DEFINITIONS in transit increased 2.9 percent representing additional investment EBIT: Earnings before interest and taxation in the grocery category associated with the rollout of the new Extra EBITDA: Earnings before interest, taxation and depreciation format stores. NCFO: Net cashflows from operating activities NPAT: Net surplus attributable to shareholders B. NET DEBT – Net debt reduced 62.7% to $43.0 million, a decrease N.M.: Not meaningful of $72.4 million from the previous year. The receipt of sale proceeds of $36.7 million from the sale of the group’s Te Rapa joint venture and proceeds of $26.7 million received from exercised employee share options were significant factors in the reduction of debt. C. GEARING – Gearing reduced to 9.4 percent consistent with a reduction in net debt. The gearing ratio remains well within the 50 percent ratio required under the group’s borrowing covenant. Gearing levels will however increase following the payment of the 35.0 cent special dividend declared in September 2007 but are expected to remain comfortably within the group’s borrowing covenants during 2008. D. CASH REALISATION RATIO – Operating cash flow reduced by 15.4 percent to $129.6 million for the year due mainly to an increase in working capital used to fund higher receivables and a change in inventory mix. OPERATING CASHFLOW NET DEBT (NZ $M) (NZ $M) 350 2.00x 180 1.80x 160 300 1.60x 140 250 1.40x 120 1.20x 200 100 1.00x 80 150 0.80x 60 0.60x 100 NET DEBT/ EBITDA 0.40x 40 50 0.20x 20 NET DEBT/EBITDA 0 0 0 01 02 03 04 05 06 07 01 02 03 04 05 06 07 Celebrating 25 Years // Page 7 On behalf of the Board of The Warehouse Group, it is my pleasure to announce a net profit after tax of $115.5 million for the year including two non-recurring items. This profit compares with $29.3 million for last year. Sales from continuing operations were up 2.4% to $1.76 billion. Net profit after tax, excluding the sale of The Base development and the divestment of the Australian business, was up from $96.2 million in 2006 to $97.9 million in 2007. Same store sales positive while Warehouse Stationery sales were Board returned $163.2 million by The improved profit attributable to up 0.9% to $213.5 million, with same way of dividends to shareholders. shareholders has been achieved through store sales up 2.2% for the year. The final dividend was 5.5 cents with ongoing improvements and continued total ordinary dividends up by 1.5c to Generous dividend payout solid operating performances from 17.5c per share paid out for the year. to investors both businesses.