Woolworths posts 12pc profit boost but headwinds remain
Australia's largest supermarket chain reported $1.7 billion net profit for the financial year ending 30 June, up 12 per cent on 2017 and broadly in-line with Morningstar's expectations.
Australia's largest supermarket chain Woolworths (ASX: WOW) reported $1.7 billion net profit for the financial year ending 30 June, up 12 per cent on 2017 and broadly in-line with Morningstar's expectations.
The board also announced a final dividend of 50 cents a share, unchanged from a year earlier, plus a special dividend of 10 cents a share.
Sales of $56.7 billion were up 3.4 per cent to across the entire group, which includes supermarkets, beverages, department stores and hotels.
However, Morningstar equity analyst Johannes Faul notes like-for-like growth in Woolworths Food – a key segment – slowed further into the first quarter of this year, "which was also in line with our thinking".
Faul expects the food retailing businesses of Woolworths and Coles, its nearest competitor and part of Wesfarmers (ASX: WES), to grow at roughly the same rate over the medium- to long-term. While Coles currently has a slight lead in supermarket earnings before interest and tax margins, Faul anticipates Woolworths will close this gap, before Coles again edges ahead.
Woolworths's food sales increased but margin pressures are a persistent challenge
Including nearly 1,000 supermarkets, Woolworths Food reported a 1.3 per cent rise in comparable sales, which excludes new store openings, in the first seven weeks of 2018-2019.
"EBIT expanded, but a signification proportion of that, we estimate, is driven by reducing their stock loss – from things like reducing spoilage and store theft," Faul says.
While noting the importance of such measures in reducing losses "which goes straight to the bottom line…they're not going to get extra profit or margin gains over time from this," he says.
Faul reaffirms his view that the strong margin growth Woolworths has enjoyed in recent years will continue "unwinding somewhat as price competition intensifies". As key challenges here, he points to intensifying competition from discount supermarket retailer Aldi and the anticipated entry of another German discount chain, Kaufland.
The looming renegotiation of Woolworths' enterprise bargaining agreement is another short-term headwind. "Management are still in the process of finalising this, but you can expect it to increase their cost of doing business," Faul says.
Woolworths says there has been early progress in the turnaround of its budget department store chain BIG W, with losses dropping 27 per cent to $110 million in 2018/19. BIG W's comparable sales rose 0.9 per cent, the first increase since 2008/09, driven by price cuts and an overhaul of the majority of its 186 stores and product ranges.
"However, financial performance will continue to be driven by the key Christmas trading period," says Woolworths chief executive, Brad Banducci.
Faul suggests the special dividend can be at least partly attributed to savings Woolworths has extracted within its fuel distribution business. Its partnership with Caltex (ASX: CTX) was renegotiated in recent months, after the Australian Competition and Consumer Commission stymied an attempted takeover of this operation by BP earlier this year.
However, Faul expects a divestment of its fuel business will occur in the near term, either through a sale or an IPO. This business unit contributes around 2 per cent to Morningstar's valuation of the broader company.
Morningstar increased its fair value estimate by 4 per cent to $24.50 in July, in response to this news from ACCC. At the time, Faul viewed Woolworths as considerably overvalued, when it was trading at around $24.50 on 5 July.
Woolworths' share price was down 20 cents to $29.30 at midday.
More from Morningstar
• Make better investment decisions with Morningstar Premium | Free 4-week trial
Glenn Freeman is senior editor, Morningstar Australia
© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.
