Another bad day for Woolworths’ shares yesterday.
While the market was mixed in reaction to poor leads from offshore, Woolies spent all of trading in the red.
The price fell under $26 and ended at $25.76, not far from the 12 month low of $25.19 hit in March after the company’s 2010 sales growth forecasts were cut in half to 4%-6%.
And the stock faces more pressures after the 2010 sales report failed to impress, leaving analysts and investors with more unanswered questions.
At the centre of these questions, the slowdown in sales at Woolworths, Australia’s largest supermarket chain, in the third and fourth quarters of the 2010 financial year.
The fall has been put down to the sluggish economy, consumers reluctant to spend and by increased discounting, not to mention a fall in food price inflation.
But not all that much has been given to the almost natural slowdown the giant retailer had to have at the end of seven years or more of double digit sales and earnings growth.
Woolies under former CEO, Roger Corbett, and then current boss, Michael Luscombe, have revitalised its logistics, slimmed the business into more defined areas, then picked new retailing sectors (liquor, hotels, petrol, financial services, New Zealand, India????) to attack and grow.
The slowly developing hardware operation is its latest new business, but unlike many of the others, it will take time and more capital than Woolies has so far deployed to boost sales and earnings.
Already analysts are questioning the spending of $1.5 billion or more over the next five years on this expansion, when it could be delivered back to shareholders.
And media reaction was also critical, with columnists wondering how the retailer will be able to protect its impressive margin and report earnings growth of 8% to 11% for the year to June 27, as predicted by the unchanged guidance.
Perhaps the most telling comment came from The Australian Financial Review’s Chanticleer, who wrote yesterday that:
"When a company starts cutting capital spending and returning money to shareholders through share buyback, you know it is running out of ideas for growth.
"That is the story at Woolworths, one of the great growth stocks of the past 20 years."
Mr Luscombe said after the release of the sales report that Woolies would bounce back by 2012 when "normal" sales growth would return.
That’s another 18 months or so of indifferent growth.
In other words, Woolies has gone ex-growth and has also probably outgrown the Australian supermarket sector, hence the move to take on Bunnings in hardware.
The logic of that move can be seen from the hardware market with one giant, a minnow or three and not much else.
But Bunnings is more entrenched in its key market than Woolies is in supermarkets, and Bunnings is no sleeping giant, ripe for the picking.
Apart from New Zealand and a small wholesale business in India, the company’s international expansion prospects have been small and limited.
While French giant (and the world’s second biggest retailer), Carrefour is quitting Thailand, Malaysia and Singapore, you’d have to question Woolies’ ability to make a go of these assets (if it was to buy them, as some analysts have suggested) if someone with more experience in the region (in Carrefour) can’t.
And going offshore might expose Woolies in its home market at a time when consumers have grown more cautious and the main competitor is being rebuilt by new owners and new, aggressive managers.
The best idea the company has had has been to do the share buy back of $400 million.
But that only has another $20 million or so to go before it’s completed.
So by the time the results are revealed in late August, there will be speculation about more capital management.
The realty is that the 4.2% rise in 2010 sales was the lowest growth for a decade.
In the year to June 2000, Woolies had sales of $20.62 billion, earnings of $295 million and an operating margin of 4.6c in the dollar.
Up to Wednesday, we know sales have risen by more than 150% to just over $51.1 billion.
We know earnings will be around over $2 billion because the company earned a net $1.835 billion in 2009 and guidance of 8%-11% puts the 2010 figure near $2 billion.
And to get there, operating margin across all the businesses will have to edge higher than the 7.2c reported in 2009.
How much higher is the question for analysts and interested small investors?
The size of the margin and the annual increase is the best sign of Woolies strength.
In the past the margin has risen by half a cent or more in some years. Operating margin is up more than 50% in the 9 years to 2009.
2010’s sales of $51.7 billion, was a major milestone for the company and Australian retailing, but come earnings time that could be the major achievement in a tough year.
CEO, Michael Luscombe’s comments in the statement and then on a conference call took us not much further than what was said in Wednesday’s sales report.
Mr Luscombe said, "We are pleased to report a $2.1 billion or 4.2% increase in sales across the group in what has undoubtedly been a challenging year for the retail sector.
"Our business-wide strategy to deliver optimum value for our customers has resulted in solid sales at a time when consumers are doing it tough and tightening the purse strings.
"In particular, our Supermarkets Division has responded well to customer demand for value and has further enhanced its position in the market."
Yes, it was a tough year and yes the competition is tougher and there are no more easy yards to be made in the Australian
