The chances of Woolworths revealing some significant capital management moves to benefit shareholders have risen with the reports the retail giant has dropped its ambitions to get its hands on some of the retail assets of rival, Coles Group.
Reports yesterday suggested that Woolies has now decided not to proceed with a request for the ACCC to review the potential acquisition of some Coles Group assets.
The suggestion helped sent the company's shares down 33c to $32.41 in yesterday afternoon's weaker market. They had jumped sharply Tuesday after the company reported an 8.9% rise in first quarter sales to $11.7 billion.
The Commission last week ruled Woolworths out of buying Coles' business supplies chain Officeworks and general merchandise chain Kmart. The Commission said it would have approved the Officeworks purchase by itself but Woolies had linked it to the purchase of Kmart, so the request to buy the two was rejected.
The ACCC deferred a decision on a separate question of whether Woolworths could buy the Coles' clothing chain Target. The Commission seemed to indicate there might be some way WOW could buy Target because the latter competed in a different segment to Big W.
Woolies had been sniffing around Coles in the faint expectation that some of the chains might become available.
But yesterday's report said Woolworths believed Coles' individual chains were no longer likely to come on the market.
Coles shareholders are due to vote on the Wesfarmers offer at a meeting on November 7 (the same day as the RBA rates decision will be made known).
The Wesfarmers bid is expected to be approved because there's no other option for Coles.
WOW now only has only one other major expansion plan still afoot; the legal challenge to the NZ Commerce Commission's rejection of its application to buy The Warehouse. (Rival Foodstuffs was also rejected.)
If successful that will cost just over $A1 billion or so.
But with the retail giant driving earnings faster than sales, it will have built up an enormous level of cash and franking credits that might be returned to shareholders in a capital management move in 2008.
The first quarter sales report brought conflicting reactions from major broking houses.
Goldman Sachs JBWere downgraded Woolies to a hold from a buy simply because its sharemarket performance has been so strong.
It was that outperformance that brought Goldman Sachs to the conclusion that the retailer's shares were well valued at the moment.
So far in 2007, WOW shares have risen 36% and are now trading at a 30% premium to other large non-bank industrial stocks
But Merrill Lynch kept its "Buy'' rating on the stock claiming "the best is yet to come'' for the retail giant, which it describes as a "wonderful investment'' while Macquarie Bank didn't change its sell recommendation.
Merrill Lynch said Woolworths' consistent re-investment in its own business compared to main competitor Coles Group's consistent neglect of its own business, was a key factor in its high rating of the stock.
This has produced a marked widening in performance between the two retailers in Woolies' favour, a situation that will only increase in coming years.
"We consider Woolworths to be a wonderful investment, both in the near term and into the sustainable future,'' its analysts said.
Macquarie's sell recommendation isn't based on anything negative in the retailer's operations, but a belief the shares have risen too far, and are now over-valued.
"We cannot fault Woolworths, it has a great business model, unique market position and favourable industry dynamics. But expectations keep rising with each year of over-achievement.''
And that was the reasoning by Goldman Sachs JBWere. Lots of praise for the operational strength, but a belief there's little value in Woolworths shares now at current price levels, especially as the firm believes same store growth will cool in coming months.
"We remain confident that the key foundations of WOW's business model, namely further costs savings and market share growth, continue to be available to WOW for the medium term. As a result we remain very confident in WOW's ability to deliver medium term EPS growth in excess of the market average.
"However the expected deceleration of a key retail metric like comparable store sales growth combined with high PE rating is likely to be a negative catalyst over the coming 6 months," JB Were said.
"We remain of the view that Woolworths strategy, which we refer to as 'cost driven market share growth', is a formidable business model in grocery retailing. This model has been shown by other global players like Tesco to deliver strong, double-digit earnings growth over a long period of time.
"We expect WOW to remain true to this model, and remain confident that the key foundations of further costs savings and market share growth continue to be available to WOW for the medium term. As a result we remain very confident in WOW's ability to deliver medium term EPS growth in excess of the market average."
Woolies is forecasting topline sales growth of 7%-10% in the first quarter in its main core business, Australian supermarkets and liquor grow top line sales 8.7%, with comparable store sales up a strong 7.6%.
But that was because the first quarter in 2006 was depressed by low consumer sentiment hit by two interest rate rises and high petrol prices. This time around the Big W chain of Woolies had a very strong first quarter, with top line and comparable store sales growth up strongly, compared to flat sales in the first three months of the 2006-07 financial year.
Supermarket same comparable store sales in the first
