Shareholders in struggling retailer, Woolworths (WOW), who turned up for yesterday’s annual meeting in Sydney got the now familiar spin from chairman Gordon Cairns – he acknowledged the problem, admitted mistakes, promised to do better, outlined some priorities and then told the audience the company had to move on.
But these comments meetings other statements from the ’new broom’ at the top of Woolies, never quite managed to explain how a leading company went off the rails and made so many value destroying decisions.
For Woolworths shareholders, the search for answers to the why and how of the situation will be well worth pursuing because the company will very likely cut dividends to conserve cash as it tries to rebuild.
The big problem for all the fine talk yesterday is that Woolies has had had such a long and fabulous track record of good management, operational excellence, solid sales growth and earnings outperformance (and fat dividends for shareholder). So how did it manage to go off the rails without anyone at management or board level asking or challenging what was happening?
So take the words from the very apologetic newish chairman in Gordon Cairns with a grain of salt, or a heft dose of scepticism. He talked a lot about changing culture, but the proof will be in the outcome, not the words.
He not only begged for shareholders’ patience, he also apologised to them for the “frankly unacceptable” 2015 results, as well as the disappointing share price performance.
He told the meeting that company’s entire leadership took responsibility for the poor results. He said Woolworths’ “most senior leaders” in chair, Ralph Waters and CEO, Grant O’Brien had stepped aside to make way for new leadership.
But it was now time to move on and urgently address the future. “I am convinced that while the business is stalled, it can be returned to the great days,” Mr Cairns told the meeting. He said that cultural change to put customers at the centre of every decision was vital – why did it ever lose focus of its customers? That is perhaps the most important question.
WOW 1Y – Embattled Woolies begs for patience
Mr Cairns said there were three broad priorities for Woolworths in the coming year. Firstly the company had to reinvigorate its core supermarket business, which accounts for 70% of Woolworths’ revenue and much of the profit.
Secondly was putting the loss-making Masters hardware business back on course, a decision that won’t go down well with many shareholders and analysts who see it as a millstone and a destroyer of value.
And the third priority was renewing the struggling Big W department store business (or General Merchandise as Woolies so confusingly describes what Big W sells).
On the Masters hardware business, Mr Cairns defended the decision to keep it going for the time being, telling the meeting that there was plenty of room for a No.2 player behind market leader Bunnings. But it is clear the final decision is to come.
"The opportunity in home improvements is compelling. It is a growing market, with a high degree of fragmentation,” he said. But he said it was clear Masters hardware business could not continue to lose $200 million a year the smaller, trade-based operation is a nice little earner, from what Woolies discloses in its reports.
Mr Cairns however did not reveal any plans for the future of Masters.
"When I joined I said I had an open mind on Masters, and that the board would be informed by the numbers from the five year plan and our options from that. This is what we as a board are working on."
Mr Cairns said the discount department store sector that Woolworths’ Big W was competing in against the likes of Kmart and Target was rapidly changing.
He said that with good leadership, there was a clear path to improve returns in at Big W and provide options in the future, he said. But he acknowledged that Big W was “making half the profit that it was five years ago”. Target (owned by Coles) is barely profitable after falling of the rails several years ago.
Kmart has been lifting its sales and profits now for the best part of five years and earned well over $400 million in 2014-15. It is now growing sales much faster than the rest of the sector. So there is obviously growth in the segment if Woolies management can get it right. Kmart has good leadership in its CEO, Guy Grossi.
Finding a new chief executive for the company (and for Big W) was also a priority for the company. Mr Cairns said, there would be further board appointments in the near future, after two in the past fortnight, including former Best and Less CEO, Holly Kramer.
And on Monday of this week, Woolworths announced that former CEO Roger Corbett, was returning in his second stint as a consultant to the company.
Mr Cairns said Mr Corbett’s understanding of the supermarket business would be invaluable – but the battle ground has changed dramatically when he was last running the company in 2006. Since then Coles has revitalised itself, Aldi has started growing aggressively and Costco, the big US volume discounter, has started expanding into Australia.
Mr Cairns promised the board would do everything in its power to return Woolworths to its rightful position as a “great company.” But it is going to be a long battle.
Woolies shares lost 1.4% yesterday to end the day at $24.20.
