There’s nothing like a big, rich share buyback, a higher dividend and confidence about the coming year to erase lingering thoughts among investors large and small that a major company may have lost its competitive spark in the face of a revitalised rival.
That’s what many investors have been the thinking about Woolworths, especially after it halved its 2010 sales estimate several months ago as the slowdown in consumer spending hit, while it seemed to only lightly touch the rebuilding Coles Group, now owned by Wesfarmers.
Woolies share price has been under pressure, going nowhere in recent months as investors wondered if the days of double digit growth, big earnings announcements and confidence in the future, were now behind the giant.
But yesterday Woolies sprang a surprise with a $700 million buyback, a bigger dividend and asserted that it was looking at another big year in 2011.
On top of that earnings were higher than forecast, up a double digit 10.1% (after a rise of that size had been discounted) to a new all time record of $2.021 billion from the previous record of $1.84 billion in the 2009 year.
Woolies shares took off, jumping almost $2 or around 7.5% in morning trading as they soared to a day’s high of $28.89.
But by the close a few second thoughts had seen the retailer’s shares marked back to a gain of 64c, or 2.4%, to $27.54.
The basket of goodies, especially the buyback, cloaks the underlying story from the result and from Woolies’ recent activities.
Apart from the costly thrust into hardware, the big retailer has nowhere else to go in the Australian economy and no other idea for growth.
So in that respect, the buyback stands out as a real option because it is after all, the shareholders’ money.
CEO Michael Luscombe said yesterday in the ASX statement that the buyback "means we will have returned over $1 billion to shareholders in the 2010 calendar year, when combined with the $325 million of capital bought back in the first half of the calendar year in our on-market buyback".
On top of the buyback, Woolworths declared a final dividend of 62c a share (56c a share in 2009); making a total for the year of $1.15 a share, up from the $1.04 paid in 2009.
As reported previously Woolies lifted sales 4.8% in 2009-10 to $51.694 billion, excluding Petrol (including Petrol, up 4.2%). Earnings before Interest and Tax rose 9.5% to $3.082.1 billion.
Delving into the result, Woolworths still increased its gross profit margin from 25.66c in the dollar to 25.91c.
The supermarket gross margin improved by 46 points (0.46%) to 24.51%.
And Woolworths made a return of 77% on funds employed in its supermarkets business.
The most important margin is the so-called EBIT margin in supermarkets.
It’s lower because the division depends on volume and small margins to drive profit.
Woolies said it boosted its EBIT (earnings before interest and tax) to sales margin in supermarkets by nearly half a cent (0.48%) to 6.45c, from 5.97c (or 6.45% from 5.97%).
It did that through lowering the costs of doing business and greater efficiencies and price cuts, with the savings being shared with consumers.
Woolies’ second-half profit rose a slightly slower 8.6% to $925 million as the federal government’s fiscal and (RBA’s) monetary stimulus faded.
Chief executive Michael Luscombe said first-quarter sales were in the ”same general trend” as a year earlier.
Buried in the profit report was news that the retailer has started another major attack on costs.
Its previous campaign was called Project Refresh, which was started by former CEO Roger Corbett.
It slashed costs dramatically by making the company’s logistics more efficient, and building bigger, computerised distribution centres (which is continuing with a new centre underway at Hoxton park in Sydney’s west).
Project Refresh provided much of the earnings momentum that Woolies has enjoyed in recent years, enabling it to capitalise on Coles’ stumbles before it was bought by Wesfarmers.
Now it has started a program it calls Quantum whose objective, according to Woolies is "to reduce costs and improve efficiencies across the Woolworths business".
"The project follows in the tradition of Project Refresh with benefits emerging in both Gross Margin and CODB which will be shared between customers and shareholders."
Woolies said key elements of the project are:
- Ramnik Narsey has been appointed to head the initiative. Ramnik is one of our most senior executives and has successfully run our Petrol business for eight years.
- It will encompass all aspects of Woolworths operations including:
- End to End supply chain – move to the next level.
- Procurement (not for resale) – lowering our costs.
- Operational work practices – improving efficiency and lowering costs.
- Global direct sourcing – significantly enhancing capability and lowering costs for the consumer.
- Support structures – significantly improving efficiency.
Several key initiatives have commenced.
The intellectual property developed in the supply chain teams, IT systems and distribution centres for our Australian Supermarkets business is now being applied to other Woolworths’ businesses, including New Zealand Supermarkets, BWS,
