Woolworth (ASX WOW), the largest Australia retailer in the ASX 50 reported earnings today that was better than market expectations. That is not to say expectations were high where the Woolworths share price is at where it is 3 years ago. As part of today’s results, it announced new Chairman and reiterated the search for a new CEO.
Woolworths Share Price Performance
Chart below shows the return of Woolworths shares year to date verses Wesfarmers (WES ASX)
Full Year Results
Net Profit After Tax decreased 12.5% to $2.146 billion. Total Sales declined marginally 0.2% at $60.7 billion.
Earning per Share for Full Year 2015 was $1.708 down 13.1% year on year.
Woolworths Full Year Results Highlights
Food, Liquor & Petrol – overall growth inline with market however disappointing outcome given strong performance of Coles. Shows Westfarmers is eating Woolies lunch and Woolies is just picking up the crumbs.
EBIT Margin while can be considered high verses international peers. One should note that due to retail market structure in Australia dominated by Woolworths, Coles, IGA and Aldi where local sub markets are dominated by 2 or 3 out of total 4 main Supermarkets.
We expect EBIT margin nevertheless trend down as part of its reinvestment program.
Year on Year sales decline is also noticeably impacted by decline in petrol sales. This is expected given the dramatic fall in the oil price (which we also no doubt felt in the Origin Energy Shares)
Woolworth New Zealand Supermarkets performed strongly, 5.2% year on year and 11.7% post FX effects.
Disappointing General Merchandise and Hotels shows the new CEO would have its work cut out for him.
On one hand, GM sector facing structural headwinds but Target and Kmart are doing ok. The new CEO needs to come up with a strong turn around for this.
Woolworths is in the hotel and pub business because it needs these licenses to sell liquor. We hope it will further rationalize the hotel real estate portfolio going forward to take advantage of the strong property investment market.
Masters lost $224.7mil in 2015 which is an acceleration of 33% from prior year. There have been calls for Woolworths to divest it self of Masters.
We hold the view that while that Home Improvement sector is a good area for WOW to be in. Short term negative earnings should be taken in order to gain a foothold verse Bunnings which is dominating the sector.
Master and Bunnings together will no saturate the home improvement sector but result in another retail market dominated by duopoly. This is good for Woolworth share price in the long run.
Balance Sheet and Cashflow
Post results on the credit rating front. Standard and Poor’s downgraded WOW from A- to BBB+. Total debt fell from $3.7b to $3.0 or down 17.8%.
We are always interested in the Property portfolio of WOW. Given the nature of business, there are signification assets on the balance sheet which are held at book value. These assets could be under appreciated by the market.
WOW received $840.0 in cashflow from sale of real estate. We think this area could be elevated going forward as the commercial real estate markets shows there are strong investment appetite for assets that are long in term in nature with strong covenants.
Woolworths has the potential to carry out sale and lease back transactions to fund future Food and Liqueur or Masters growth.
We assume the new Woolworth CEO would undertake a strategic review focusing on:
1. Food and Liquor competition from Aldi – we have the view that while pricing is important. WOW could fend off Aldi by developing with partners for exclusive brands for woolworths, saturate the market with choices which consumers would not have at Aldi supermarkets by increase SKU
2. General Merchandise – will take time to turnaround
3. Masters – If management view is take at face value that new store format is working then this will need time to turn around for the new store opening to flow through. We are positive on the sector and Woolies should continue focus on this area.
We are long term investors in nature it is positive to see company to invest capital in new areas. The dividend is not at risk at this stage. Those that want masters cut and use the proceeds for dividends are short sighted.
Would be positive if management breakout masters store EBIT by vintage year like G8 Education to show the progress made so far.
Until the new strategy is communicated to the market. We hold market weight in Woolworths in our portfolio but will participate in any Woolworth DRP.
Woolworths Dividend Per Share
The dividend has grown at every reporting date over the last 10 years. It speaks to the strength of the business that it could return capital to shareholders while at the same time executing a disaster like Masters.
WOW Dividend Dates 2017
Interim Ex-Dividend Date: 2 March 2017
Interim Record Date: 3 March 2017
Interim Dividend Payment Date: 7 April 2017
Final Ex-Dividend Date: 7 September 2017
Final Record Date: 8 September 2017
Final Dividend Payment Date: 6 October 2017