Bad news from Metcash (MTS) as the shares tanked yesterday, and more pressure for Woolworths (WOW) as analysts scrambled to catch up to reality with a slew of downgrades after the weak third quarter sales report on Wednesday and unimpressive strategy discussion.
Woolies shares lost another 2% in value yesterday on top of Wednesday’s 5% drop, while Metcash shares hit a 14 year low of $1.24 as it was forced to own up to more sackings in a second round of job cuts in the last two months.
That was after Woolies announced a further 400 job cuts on top of the 400 people quietly cut in the past couple of months.
A Metcash spokesman said there would be 60 jobs lost in the near future “as part of the company’s ongoing efficiency review”. Those losing their jobs would be offered “redeployment where possible,” according to Fairfax Media. The cuts are thought to be part of Metcash’s restructuring program which was first announced late last year.
Metcash’s shares have lost around 35% so far in 2015 as investors have soured on some retailers (with the exception of Wesfarmers and its Coles and other chains).
WES vs WOW vs MTS YTD – Woolies, Metcash slash more jobs
For Woolies though, a bigger concern – a loss of confidence among investment analysts, judging by the negative reports issued yesterday and making their way into the business media yesterday and overnight.
Woolworths plans to cut costs by $500 million and invest the savings into cutting prices and improving service to better compete against Coles, and refresh its own private label brands (Select and Homebrand ) to take on Aldi. To some analysts, Woolies will be fighting a war on two fronts.
Analysts reckon this means that Woolies won’t be taking on Coles and Aldi (and Metcash) in a full blown price war, but will attempt to match their price levels.
But this will come at the cost of lower profit margins in its heartland – the $44 billion a year Australian food and liquor operation – some claim it could cut earnings before interest and tax by up to $300 million.
Citigroup analyst Craig Woolford cut his 2016 net profit forecast by 5.1% and his 2017 forecast by 7.3%, saying food and liquor margins could fall from 8% to 6.6% by 2017 and 6.2% by 2018.
Morgan Stanley cut its 2014-15 underlying net profit forecast by 0.4% to $2.48 billion, compared with $2.45 billion in 2014 – representing growth of 1.1% compared with Woolworths’ current guidance for 1.8% growth.
Morgan Stanley also lowered its 2016 forecast by 1% and expects profits to fall to $2.32 billion in 2017 before rising slowly in 2018 and 2019.
Macquarie Bank questioned the strategy and whether Woolworths actually needed to cut prices harder and rebase earnings to regain lost market share. The bank is now forecasting an 0.8% rise in underlying net profit to $2.47 billion this year but a 3.8% drop to $2.38 billion in 2015-16.
"While price matching rather than striving for price leadership is a lower risk, sustainable long term strategy (if executed correctly), it is likely to result in a long, drawn-out recovery without an immediate catalyst to win back sales momentum and value perception," said Macquarie Bank analyst Brian Raynor.
And, Deutsche Bank analyst Michael Simotas trimmed his 2015 underlying net profit forecast by 0.7% to $2.48 billion and his 2016 forecast by 1% to $2.44 billion.
Mr Simotas questioned the lack of detail on Woolworths’ plans to overhaul its marketing, which has proven to be ineffective at communicating value to consumers.
"We believe without improved marketing Woolworths will continue to struggle with its value perception," he said.
Woolies shares ended the day on $27.57 – within sight of a three year low. Metcash finished on 1.245, as close as anything to the 14 year low.
