Two differing reactions yesterday from ratings group Moody’s towards two major companies – one positive, one negative.
The first saw Moody’s drop Woolworths’ (WOW) outlook to negative from stable after yesterday’s changes. The other was a mini upgrade for Qantas (QAN), which Moody’s moved up to positive from negative.
On Woolies, lowered the outlook based on Woolworths’ sales across its food and liquor business, which yesterday’s trading update from the retailer confirmed.
"The change in outlook to negative from stable reflects the continued material negative trend in comparable store sales across the Australian Food and Liquor business, the core business supporting the company’s ratings", says Ian Chitterer, a Moody’s Vice President and Senior Analyst.
"In the absence of a rapid response by the company and clear turnaround, the difficulties that Woolworths is experiencing in arresting the negative momentum in comparable store sales, combined with our expectation of continued shelf price deflation due to the need to address pricing relative to Coles and Aldi is likely to result in key credit metrics for the 2016 financial year outside the tolerance levels for the A3 rating," says Chitterer who is lead analyst for the company.
"The negative outlook also reflects our expectation that comparable store sales will likely continue to be volatile over the next 12-to-18 months as Woolworths transformation plans are actioned in an environment where its shelf prices are likely to come under increasing downward pressure," adds Chitterer.
"Woolworths credit profile has continued to deteriorate due to the operational underperformance of the Australian Food and Liquor, General Merchandise, and Home Improvement segments over the past 12 months," says Chitterer.
“The trend in comparable store sales growth at the Australian Food and Liquor business has been falling since the third quarter of 2014 when it was reported at 3.5% and the Woolworths announcement today was the first negative number, reported at – 0.7% for the fourth quarter of 2015 to date," according to Chitterer.
Moody’s expects that Woolworths key credit metrics for 2015 will weaken from the levels reported in 2014 with debt-to-EBITDA of around 3.3x expect as at FYE. This compares to around 3.0x for the financial year ended June 2014 (FY14).
The change in outlook follows Moody’s previous comments that the outlook could be moved to negative should Woolworths not manage to stabilise the decline in comparable store sales at the core supermarket business in the near term.
Woolworths chief executive Grant O’Brien announced his departure from the supermarket giant as the retailer downgraded its profit guidance and announced it would axe 1,200 jobs (which is really 1,600).
Woolies said earnings in the year to the end of June would be flat compared to last year’s $2.15 billion (after more than $200 million in one off costs were set aside). Woolies shares ended slightly lower on $26.80.
