Can Warehouse boss Powell deliver profits from new investments?

Warehouse Group, New Zealand's largest publicly listed retailer, expects its 'red sheds' to return to earnings growth next financial year as its store rejuvenation bears fruit and says the success of its drive to expand through acquisitions should be evident within three years.

Under chief executive Mark Powell, who notches up three years in the job next month, the company is investing $430 million over five years improving the quality of its private label brands, investing in staff and modernising the stores, in a bid to lure back customers and revive sales.

Powell says that two thirds of the way through the programme, the strategy is paying off with the 'red sheds' - its distinctive large store general goods format - posting 12 consecutive quarters of same store sales growth following seven years of decline.

"That's a big swing," Powell said on a tour of his store at the Albany Mega Centre. "We have got to put a lot of investment into the red sheds to turn around customer perception, invest in the stores, invest in the stock and invest in people. This is definitely starting to translate into increased transactions from more customers coming into store."

Still, analysts and investors say the store improvements and rise in sales have come at the expense of profitability, with margins and profits at the red sheds declining in the first half of this financial year. Powell concedes that the rise in sales hasn't yet translated into profits.

"It hasn't translated into operating leverage yet," Powell said. "The key word is yet. We would want to see it translating into operating leverage in the next financial year."

Powell says Warehouse had underinvested in its 92 discount stores in the past, refitting just 10 stores in the nine years before he took over, when it should have been upgrading 12 to 13 stores a year.

"We have had to make a big step to catch back up and it will drop down by the end of calendar 2015 to a normal rate," he said.

Powell is phasing out "cheap and nasty" private label brands for better quality products without raising the price after some products had a 20 percent return rate, damaging the Warehouse brand. Their Veon televisions are now the nation's highest selling by unit after replacing Transonic two years ago. Under the new regime, a product is pulled from sale if it has a return rate of 5 percent.

To improve customer service, Warehouse has undertaken what it believes is the country's biggest training programme of 6,000 employees, using actors to help staff understand what it feels like emotionally to interact with customers. Powell says he is avoiding short term benefits that could result from cutting staff numbers because unstocked shelves, unpriced products or longer checkout queues "insidiously eats away at the experience".

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Can Warehouse boss Powell deliver profits from new investments?