Not so wow! Investors sent Woolworths (WOW) shares sharply higher at one stage yesterday in a relief rally that was based on the immediate belief the retailer had put all the bad news behind it after getting rid of its costly hardware debacle.
The shares jumped more than 7.6% to a day’s high of $26.05, the highest the shares have been for 10 months. The surge faded in the afternoon as investors realised the retailer’s basic problems remain, and the shares then fell back to close the day at $25.17, up 3.9%. That’s also the highest the shares have closed since last October.
One thing is clear from the retailer’s 2015-16 results is that it has a substantial task ahead as it tries for a major turnaround in performance – the underlying figures in yesterday’s report (separated from the hardware losses) tell us Woolies lost its way badly in its core supermarkets and liquor business and allowed itself to become the high cost, fat profit margin sucker that Coles and Aldi have picked clean.
Woolies took an already announced a post-tax charge of $3.2 billion from its write downs and impairments from the Masters Home Improvement debacle.
As a result, it moved to a statutory net loss after tax of A$1.23 billion for the year to June, from a profit of $2.15 billion in 2014-15.
This was the first net loss since the company re-listed on the Australian Stock Exchange in 1993. Total revenue was marginally lower at $58.1 billion compared to $58.8 billion last year.
The company’s post-tax (underlying) profit from continuing operations slumped 64.4% to $803.5 million from a profit of $2.26 billion in 2014-15. The industry looked at forecasts for underlying earnings around $1.6 billion, while some analysts cut that to around $1 billion.
As a result of this rotten performance Board slashed the full-year dividend payment to 77 cents a share, down 44.6% from last year’s payout of $1.39, with the final of 33 cents a share. That is always the best indicator of how poor the result was, and the lack of confidence about the outlook.
Woolies finalised its exit from the hardware adventure after the market closed on Wednesday with an announcement detailing the deal with Metcash to sell it the Home Hardware business, and the selling off most of the Master’s stores and the stock. Woolies will get back around $500 million before it settles with Lowes, its US partner.
Woolies CEO, Brad Banducci, said yesterday the 2016 financial year was one of “unprecedented change” for Woolworths, and that the decisions taken and investments made, while they have had a material impact on the FY16 result, “have been necessary to begin the building of Woolworths.” (all an understatement)
He said in a statement "We are seeing early signs of progress as we work to restore our competitiveness and improve our culture in Australian food. We have also addressed significant issues facing the Group with the decision to exit Home Improvement and decisive action taken on BIG W to reposition the business.
The Big W discount department store chain was separated from the rest of the company earlier this year and could be sold if it doesn’t improve its loss making performance and weak sales.
Big W’s earnings before interest and tax fell to a loss of $14.9 million, compared to earnings of $111.7 million last year.
In its results presentation, Woolworths said it planned to revamp Big W stores by overhauling store stock and workflow processes to improve productivity.
Big W is looking to build 10 new stores over the next five years in areas where it has no brand presence yet, and Woolies claimed opportunities remained in Australia’s largest shopping malls.
The poorly performing Big W is another example of the dud management the retailer has had in recent years (and the struggles at Target is an example of the lack of good management at Wesfarmers, even though Kmart has out performed the entire retailing sector in the past four years).
Mr Banducci added that while Woolworths was regaining competitiveness in its core supermarket business, "we are not underestimating the size of the task that lies ahead, especially given the competitive nature of the markets in which we operate.”
Sales in its key supermarkets business fell 0.2% from 2015 to $34.8 billion, while the slide in global oil prices triggered an 18.1% in the value of petrol sales in the year to June.
That helped produce a 40.8% slide in earnings before interest and tax, to $1.76 billion in its core Australian supermarkets and petrol division, from $2.97 billion a year ago. Coles’ supermarket EBIT margin is 4.7% Woolworths’ supermarket EBIT margin has now been cut to 4.47% from greedy 7.33%. That is Woolies is in the predicament it now finds itself battling (forgetting the abysmal Master hardware disaster).
That high margin allowed room for Coles, Aldi and Costco to attack Woolies, also gave breathing room to Coles and allowed Metcash to recover from its own self-inflicted problems.
Reversing that performance is what the turnaround at Woolies is all about, not Big W. It’s why until there is firm evidence of a recovery in this core business, any run up in the Woolies share price is pie in the sky thinking from investors and analysts.
With Coles competitive and Aldi keeping the entire sector honest (helped by Costco) and intense price discounting and deflation, a turnaround is going to be hard work for the retailer, let alone one that happens quickly.
