WHL earnings fell in 1H22 with diluted HEPS of 165.8cps (-35.5% y-y). The results were impacted by prolonged lockdowns in Australia and a distorted prior year base. WHL FBH’s sales growth improved but remains volatile. Management’s FY24 turnover target for FBH would require sales growth of 6.3% p.a. over the next three years, but considering its space cuts, its trading densities will need to improve by 10.0% p.a. to achieve the goal. FBH’s trading densities dropped 15.9% in real terms since 1H18, and we think this could be a stretch target. We also believe the GPM target of 48% for FBH could be challenging as several factors could undermine this goal, including third-party brands and more online sales.
We believe the Food GPM could remain under pressure with the increased competition. Plans to rapidly expand its online Dash offering could impact in-store sales growth, in our view. We calculate that in-store sales growth was only 2.9% y-y in 1H22, as the online sales contribution increased from 2.2% to 3.1%.
David Jones’ financial position improved but we are concerned about the higher operational leverage. The Elizabeth Street store’s rent starts at AUD25m p.a. and escalates at 2.5% p.a. If this store’s sales growth falters, its rental could consume c.34% of its GP by 2030. With space cuts in the rest of the chain, the flagship store will account for 10% of total David Jones space by 2024, and its performance could weigh on the division.