Earlier this week The Warehouse Group announced the acquisition of Noel Leeming Group for $65m. Management stated in its release that Noel Leeming will contribute $4m-$6m of earnings before interest and tax (EBIT) during the important Christmas/New Year trading period. However, no full year forecasts were given.
Noel Leeming is a well-known consumer electronics and whiteware retailer with a large national footprint. This acquisition will allow The Warehouse to access products and brands it doesn’t currently offer, as well as providing operational synergies across the Group.
This consolidation of the retail industry re-iterates the current tough conditions in the sector. Retailers have had to re-evaluate their business models, find synergies where possible and cut cost in order to remain competitive.
The Warehouse believes this acquisition will improve the performance of its “Red Sheds” which has seen its EBIT margins decline from 8.8% in 2007 to 5.3% in 2012.
However, sustained profitability and margin expansion comes from growing sales and lowering costs, not just the latter. The Warehouse has been struggling to improve sales for a while now and the Noel Lemming purchase may be its best way to increase sales. But margins will be diluted with Noel Leeming on a much lower EBIT margin of 1.7% in 2012.
This acquisition will provide a boost to sales and profitability of The Warehouse over the Christmas/New Year period but investors are not convinced it will have long term benefits.