Woolworths (WOW) shares leapt more than 7% yesterday as the company unveiled a second round of house cleaning at a cost of more than $900 million, on top of the $3.2 billion plus of losses and impairments revealed in February.
A series of moves will see the retailer close a number of underperforming outlets in Australia and NZ, sack 500 staff and redeploy hundreds of others from head office to front line operations, write off $309 million on the $306 million purchase of the EziBuy online business in 2013. That will be sold if anyone wants it.
And in the most interesting move, Big W will be positioned as a standalone business, raising immediate speculation that it will be sold, possibly to private equity.
And Woolies will cut the number of new supermarkets open it plans to open in the next three years from 90 to 45 in Australia and NZ. Besides the closure of of 27 stores in Australia and NZ (said to be under performing), three hotels will also be shut.
Woolies shares ended at $24.19, up 7.7%, as investors leapt into the shares in the belief that its dud assets and weak performance would soon be a thing of the past.
The $3.2 billion of losses was linked to the disaster that is the Master’s hardware adventure by Woolworths, which also included the better performing businesses, Tradelink and Home Hardware. The latter could be bought by Metcash (MTS) for around a quarter of a billion dollars.
Woolies shares rose strongly (it was the biggest rise for nearly 20 years) on the premise that investors believe the years of underperformance and weak returns will be over in 2017 and now is the time to load up with shares. The big question though is whether this revamp improves Woolies’ performance with customers. Aldi has now grabbed 10% of the national grocery market, according to the competition regulator, the ACCC.
So far Coles has fought the Aldi challenge better than Woolies. Coles sales are growing at more than 5%, Woolies sales are flat. Boosting those will be the big challenge for the new management team at Woolies.
Analysts think the tough decisions have been made on hardware, and now the troubled Big W business will be revamped and the troubled EziBuy business will be shoved out the door, weak supermarkets are being closed and more will be spent on revamping existing ones (but successive Woolies managements have talked about doing that because it is a pretty cost effective way of boosting sales growth in the short term).
CEO Brad Banducci has been doing the numbers on a new strategy since being named to the toughest job in Australian retailing in February.
The decision to quit hardware and revamp the board was overseen by chairman Gordon Cairns to free Banducci from involvement with the hardware sales process and to allow him to devise a new strategy for the underperforming retail giant.
He said yesterday that sales per square metre and ‘Return On Funds Employed’ would be introduced as long-term performance indicators of how stores were performing under a new operating model.
About 500 jobs will be permanently removed from Woolies’ support office and supply chain, while 1,000 others will be moved “ irectly into our businesses to improve accountability and help us better support our store teams and customers,” Mr Banducci said in yesterday’s statement.
"Today’s announcement demonstrates both the progress we are making and our absolute commitment to act quickly to rebuild the business by doing the right thing by our customers, shareholders, team and suppliers," he said.
His review will lead to further restructuring costs of $959 million ($571 million non-cash) or $766 million after tax to be recognised in 2015-16. That means the full $4.2 billion of impairment and other costs will be loaded on to the reign of former cEO Grant O’Brien and chairman Ralph Waters who have retired.
The company said its earnings before interest and tax from continuing operations, before significant items, would come in between $2.55 billion and $2.57 billion for the year.
That will be around 23% lower than the $3.225 billion earned on the same basis in the 2014-15 financial year.The store closures exclude Big W stores.
A further 34 underperforming stores were identified at a cost of $71 million to the retailer.
Closing the supermarkets in Australia and NZ will cost the Woolies $344 million, around a third of yesterday’s write-offs. Some shopping centre owners will feel the pain.
Supermarkets are usually good attractors of customers (foot traffic in retailing jargon). Poorly performing supermarkets usually mean poorly performing centres.
Woolworths lost $972.7 million in the first half to December which was the first for more than 20 years, driven by the $1.9 billion write down in the value of the troubled Masters hardware business.
The main business also was weaker with sales dropping 1.4% to $32 billion. And Australian food and liquor sales were flat at $22.34 billion, up just 0.7% over the six months.
The company decided on a $3.25 billion pre-tax ($1.898 billion post-tax) impairment on the hardware business which has been losing about $200 million a year. The latest half year results show the losses widened to $125 million for the six months to December.
Stripping out the write downs, underlying profit was still down by one-third to $925.8 million.
