Supermarket giant Woolworths (WOW) has sunk $972.7 million into the red in the first half after over $3 billion in impairments and losses on its rotten Masters hardware adventure.
It was the retailer’s first loss in 23 years and shareholders are paying for management stuff ups with a 34% slash to interim dividend, from 67 cents a share to 44 cents.
More than $3.2 billion of impairment losses on the Master’s hardware adventure was the headline grabber, but the hack to interim dividend wasn’t far behind.
Sales fell 1.4% to $32 billion for the six months, itself an indictment on the dud management at the country’s biggest retailer, even before the impact of the hardware losses.
Earnings for the half year plunged 33% to $925.8 million after tax, and 31.6% on an earnings before interest and tax level to $1.456 billion – which tells us Woolies just wasn’t competitive in its supermarkets (but not grog), Big W and other parts of the business.
The Woolies board and then chair Ralph Waters, CEO Grant O’Brien (who finally departed Woolies on Thursday night) and the previous management team have to share most of the blame as Woolies’ costs and prices rose, the hardware adventure was dreamed up, suppliers were screwed and prices in the company’s core supermarkets were allowed to drift upwards (generating more profit for shareholders and senior management).
But then Coles, and then Aldi began stealing sales and earnings with cheaper prices, and smarter marketing, adding to the sense of crisis inside the retailer as it struggled to get the Masters expansion (with US group, Lowes Cos.) working, without success.
The only good news was that the retailer has found a new CEO to replace Mr O’Brien. The new bloke is Brad Banducci, the present boss of Woolies food group, but crucially someone who steered the starring Dan Murphy operation.
In announcing his appointment, chairman Gordon Cairns said:
"The Board undertook a rigorous international search process to find the best person to rebuild Woolworths and return it to sustainable growth. Brad has had 25 years in retail, including 15 years consulting to some of the world’s leading retailers.
"He has successful private equity experience with Cellarmasters. Brad has been at Woolworths for five years during which time he led Dan Murphy’s to become one of Australia’s great retailers. For the last 12 months he has been leading the turnaround of our Supermarkets business.”
“The decision to exit Home Improvement will allow Woolworths to focus its energy and resources on strengthening and executing its plans in its core businesses.
"Sally Macdonald’s appointment will allow Woolworths to benefit from the potential upside we see in BIG W.
"The Board is committed to a solid investment grade credit rating. We need to prioritise from growth capex to stay-inbusiness capex as we seek to accelerate the renewal of our store network. To provide some funding flexibility we have introduced a 1.5% discount on the Dividend Reinvestment Plan.
"Finally, given the importance of dividends to many of our shareholders we have decided to maintain our 70% payout ratio.
“There is a lot of hard work ahead of us but we are very clear on our priorities and are confident we have the leadership team to get us there,” Mr Cairns said.
WOW vs XJO 2Y – Value destruction at Woolies
Looking at how the various business in Woolies went in the half year, we find that the core Australian Food, Liquor and Petrol was the big problem, reporting a 31.7% fall in earnings before interest and tax on the prior year.
The company said that reflected "subdued sales growth driven primarily by deflation from significant investment in better prices for our customers. Sales momentum improved slightly during Q2’16 with December our best trading month of the half,” the company said.
But comparable store sales in supermarkets fell 0.8% to $22.3 billion in the half as Woolworths cut prices on popular groceries to try to lure back disaffected shoppers.
"Importantly, we delivered a materially improved Christmas for our customers on last year. However, trading remains volatile and there remains a lot more to do,” directors added.
“Liquor continued to perform strongly and gain market share with all formats (Dan Murphy’s, BWS and Online) delivering an improved sales performance. Monthly sales in our retail liquor businesses exceeded $1 billion for the first time in December.
“Countdown Supermarkets delivered EBIT in New Zealand Dollars slightly above the prior year in a competitive market driven by a strong focus on costs.
“General Merchandise delivered an improved sales result during the second quarter with comparable sales growth of -1.7%. However, comparable sales for the half were still negative resulting in a lower profit than the prior year.
“Hotels delivered an improved sales performance during the half. Earnings were impacted by noncomparable costs on the prior year disposal of 54 freehold properties. Excluding these items, EBIT was up marginally on the prior year.
And while there was a bit hit taken on Masters, there is probably more pain ahead for shareholders to contemplate.
The valuation process of Lowe’s shareholding in Masters “is underway and will be determined by an independent expert process unless a negotiated outcome can be reached.”
“The sale process of Masters and Home Timber and Hardware has commenced and is expected to continue into FY17,” the company said.
Lowe’s this week indicated they were looking at the losses and the involvement in Masters, with some analysts left with the view that legal action against Woolworths might result.
That will involve extra costs, if it eventuates. There is certain to be a substantial payment to Lowe’s.
And if Woolies has to sell Home Timber and Hardware at a lower price, then that could involve more losses.
Ands the new CEO has to quickly produce signs of a turnaround in supermarkets if he is to win and retain the trust of investors.
Woolies has no more credit left in the markets.
