Like it or not you'd have to wonder if Woolworths has shot itself in a small appendage over the past couple of days, despite the flood of gush from some broking analysts about the 2007 sales figures and profit guidance.
Woolies advanced the release of the figures a week to pressure the proposed merger between Coles and Wesfarmers, and yet it has been pummelled by the market in the past two days.
Admittedly Tuesday and yesterday were tough days in the market with the US off and metal prices weaker.
The only saving grace for WOW and its management is that Coles is down, off 7c to $15.14, while Wesfarmers dropped a sharp 58c to $40.60 yesterday, putting the price well under the 'call it off' level (over 20 trading days) of $41.16.
But WOW shares fell another 36c yesterday to close at $27.83. That's on top of Tuesday's 86c fall.
That's cold comfort for Woolies board and management which have seen more than $1.4 billion wiped off its market capitalisation over the past two days.
Now market cap is a difficult to capture and hold thing, unlike earnings, which Woolies is doing very successfully.
But in advancing its results a week to boast about a slight upgrade in earnings of two per cent, WOW is paid a heavy and probably unrealistic price.
By advancing the release date and telling everyone about it Woolies gave the impression of a sharp upgrade in earnings being in the offing.
There wasn't, it was only two per cent.
But there was a sharply improvement in fourth quarter sales, with same store sales rising a very, very strong 8.2 per cent.
That in itself will be more than twice the topline sales growth for Coles for the full year, let alone a quarter.
But to boast that net earnings will be around $280 million higher and to see market cap shredded by $1.44 billion, seems to be an uneven outcome, no matter what the analysts said.
Typical of the Woolies bulls was this from Merrill Lynch yesterday in a client note.
"In our view, Woolworths has made a compelling statement (yesterday)," Merrills said in the note to clients.
"It is going to re-invest very heavily in price to gain additional customers and their spend.
"Woolworths is going hard to win market share and that should be a very concerning statement for all of its competitors."
"Given the strength of (yesterday's) sales numbers the strategy is clearly working. And given the state of the major competitor we think the strategy is going to continue working.
"The miss in fiscal year 2007 earnings should therefore not be considered concerning but as an investment toward future sales growth and consequently earnings by Woolworths."
The Merrill Lynch analysis said there was "no doubt" Woolworths could have forecast profit growth of between 35 and 40 per cent but had opted against a "trophy profit".
Merrill Lynch said Woolworths had sacrificed a few percentage points in short term growth "to establish a sales and cost platform that its major competitor may never close in on".
"To us, Woolworths is investing heavily (in the tens of millions of dollars) to capture customers from its major competitor that won't be won back irrespective of who owns Coles," it said.
In contrast, Credit Suisse was a little more conservative:
"WOW has reported 4Q07 sales growth of 9.6%. Food and Liquor and BIG W were the strongest segments, with 8.2% and 8.7% comparable growth, respectively. FY07 Earnings growth guidance was upgraded from 20%-24% to 25%-27%.
"The uplift in sales was strong and indicative that WOW has continued to take share in supermarkets, with market share gains doubling in 4Q07. While we remain ahead of guidance, we have revised our earnings expectations downward to 29% growth in FY07 NPAT to $1.31bn.
"In light of the announcement, we are concerned that the strong sales growth is not flowing through to improve operating leverage. However, this could also be explained by a higher level of transitional costs.
"The slight reduction in earnings has been more than offset by appreciation of the market. On the back of our FY08F and FY09F revisions the net change in to our 12-month target price is from $26.35 to $28.76."
