The pain and pressure grows on Woolworths (WOW), sending the shares to test 8-year lows for a second time this week after rating group Moody’s cut its credit outlook to negative, blaming the lack of leadership at Australia’s largest retailer.
Moody’s affirmed Woolworths’ Baa1 rating, which was reduced from A3 in August, but changed the outlook to negative from stable – a sign that it may cut the retail giant’s rating in the next 18 months.
It’s the second ratings downgrade from Moody’s on Woolies since last August when it reduced its core rating to Baa1 from A3, but left the outlook stable.
The big worry for Moody’s and others in the market is the lack of any apparent progress on finding a new CEO – a move regarded as the most important for the new look board headed by new chair Gordon Cairns.
The catalyst though was the weak trading update last week and the sharp profit downgrade for the first half year period.
The change in outlook saw the shares dip 1.1% to $23.73, just above the 8 year lows reached on Monday of around $23.60.
WOW vs XJO 1Y – More pain at Woolworths
Moody’s vice-president and senior analyst Ian Chitterer said in a statement yesterday that the negative outlook was prompted by Woolworths’ weak first quarter sales and last week’s profit downgrade – the third this year – which pushed credit metrics closer to tolerance limits for its Baa1 rating.
“Woolworths will also be going into the important Christmas holiday period without a new CEO, and we have no visibility on when this crucial role will be filled," Mr Chitterer said.
Mr Chitterer said the latest profit downgrade demonstrated the “unpredictability and rapid evolution” of Woolworths’ operating performance and the negative momentum in its core food and liquor business, as well as ongoing weakness at Big W and Masters.
"The first quarter result highlights the loss in market share and margin erosion of the food and liquor business, where significant investments in the last six months of around $300 million have not yet yielded the desired customer response," Chitterer said.
“While the company appears to be taking the right steps, the amount of investment required to return the business to an acceptable level of comparable-store sales growth is uncertain and could be more costly, and take significantly longer, than currently anticipated," he said.
Earlier this week Mr Chitterer was quoted in media reports as expressing growing concern about Woolies.
He said the Woolworths board needed to make tough decisions, including cutting the dividend and potentially sell assets such as BIG W, Masters and even New Zealand supermarkets.
“The deterioration in the business … is obviously very concerning,” Mr Chitterer, was quoted as saying in the Fairfax Media.
"It’s the pace of the decline that’s surprising. [Comparable store sales] for the first eight weeks were down 0.8 per cent then the last three weeks negative 1.2 per cent.
"Those numbers are getting worse and the trajectory is still negative at this stage. They can patch up the balance sheet but at the end of the day you have to stop the decline in same-store sales.
"We’ll talk to management about [the options] and try to gauge their commitment to a credit rating, and what they’re prepared to do given the earnings decline to arrest the increase in leverage and try to understand what they’ll be doing in the business not so much from an operational side but capital management issues."
Rival ratings group Standard & Poor’s revised its outlook on Woolworths to negative from stable last week in the wake of the retailer’s 2015-16 earnings downgrade.
Moody’s has now joined S&P in putting Woolies board on notice of a further cut in the company’s rating, and it’s clear the country’s biggest retailer needs to do something dramatic and well grounded in basic finance to change the negative views.
