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SUPERMARKET WARS : Which one to buy ?

October 13, 2015 | Team Kalkine
SUPERMARKET WARS : Which one to buy ?

Wesfarmers



Improving Coles performance: Wesfarmers Ltd (ASX:WES) reported a slight increase in revenue that is of the order of 0.2% year on year (yoy) to $62.4 billion in the fiscal year of 2015, driven by better merchandise offers & enhanced value to customers. But, the group’s net profit after tax plunged by 9.3% yoy to $2,440 million impacted by Industrials division segment, decrease in customer project activity and commodity prices pressure. Meanwhile, the group’s Coles division revenues rose by 2.2% yoy to $38,201 million as its investments in price paid off and enhanced services led to rise in transactions, basket size and sales density. Food and liquor comparable sales increased 3.9% yoy while fresh categories delivered double digit sales growth. As per Kmart division highlights, the comparable store sales rose by 4.6% yoy driven by better transactions and Kmart opened 11 new stores and finished 29 refurbishments. EBIT for Coles, Kmart and home improvement divisions surged by 6.6%, 11.1% and 18%, respectively, during the period driven by the group’s cost efficiency measures.


Wesfarmers divisions’ performance in FY15 (Source: Company Reports)

Stock Performance: The shares of Wesfarmers fell over 8.07% in the last six months on concerns of the tough market conditions impact on consumer spending. On the other hand, the stock started consolidating in the last three months with a 2.47% rise generating a slight returns. WES estimates a better performance in FY16 across its Coles, Kmart, Bunnings and Officeworks divisions. The growth efforts in Coles have started paying off and WES intends to continue its customer driven strategies and focus on productivity and pricing to achieve further growth. Kmart estimates to open six new stores and make 40 refurbishments during FY2016. The group projects to open around 15 to 18 new Bunnings Warehouse stores in FY2016 and FY2017. WES is trading at a reasonable P/E of 18.6x against its peers and has a strong dividend yield of over 4.98%. We believe the stock is EXPENSIVE at the current price of $40.58 and wouwld review it again at a later date.


WES Daily Chart (Source: Thomson Reuters)
 

Woolworths Limited



Focus on pricingto revamp growth: Woolworths Limited (ASX: WOW) business continued to witness pressure wherein its sales fell 0.2% yoy to of $60.7 billion impacted by the group’s Australian Food, liquor and petrol as well as General Merchandise segments. The net profit after tax plunged by 12.5% yoy to $2.15 billion during the year. Therefore, WOW launched an Australian Supermarket Customer first Strategy to revive its business across all the segments, and sustain market competition. The group invested over $200 million on price during the second half of FY15, and estimates to do the same in the first half of FY16. Accordingly, over 9,000 items from WOW were cheaper as compared to its major competitor Coles during fourth quarter of 2015, as per Nielsen Homescan reports. Moreover, WOW’s transition to Lean Retail Model helped it to achieve significant costs savings of >$500 million, ahead of their targets. On the other hand, Moody’s issued a credit rating on the firm as BBB+ for its long-term senior unsecured note with a stable outlook from A credit rating with negative outlook.

         
Segment Performance (Source: Company reports)
 
Stock Performance: Woolworths stock fell over 9.41% in the last six months (as of Oct 13, 2015) due to intensifying competition, decline in credit ratings and impact on consumer spending due to current volatile conditions. On the other hand, we believe that WOW is focusing on its pricing and customer experience to maintain its market share. Woolworths also has a strong dividend yield of 5.23%. The stock recovered over 8.57% in last four weeks but is still trading at a cheaper valuation with P/E at 15.57x, as compared to competitors like WES (with a P/E of 18.6x). We reiterate our “BUY” recommendation on WOW at current price of $26.82.


WOW Daily Chart (Source: Thomson Reuters)
 

Metcash



Pricing and private labels enhancement related initiatives: Metcash Limited (ASX: MTS) reported a modest increase in its revenues by 1.7% yoy to $13.6 billion in FY15, driven by 16% and 10.6% rise in hardware & automotive and Liquor segments, respectively. However, the group’s MF&G and corporate segments declined by 26.1% and 41.2%, respectively. Moreover, the group’s underlying profit after tax plunged by 17.4% yoy to $193 million in FY15. Therefore, MTS implemented Price Match program in over 600 stores, wherein over 300 like for like stores delivered a 330 basis points progress in wholesale sales during the second half of 2015. Moreover, the Price Match program contributed to the increase of wholesale sales by 340 basis points. Over 1,100 stores witnessed competitive Private Label pricing by the group wherein around 500 stores delivered a better warehouse sales of 1150 basis points. Meanwhile, MTS sold its Metcash Automotive Holdings to Burson Group and received net proceeds of $225 million (before tax). The group is diverting these funds to redeem the outstanding US Private Placement notes of US$200 million. The company has committed $600 million in capital to help its wholesale business.


Strategy Focus (Source: Company reports)
 
Stock Performance: Metcash stock plunged over 26.85% (as of Oct 13, 2015) during this year to date owing to earnings pressure, mounting competition and volatile consumer spending conditions. On the other hand, Metcash made investments to improve pricings, deliver enhanced private label and fresh ranges in the stores as well as undertook refurbishment program. The group already started benefiting from these programs. Metcash is planning to open over 100 stores in the next fiscal year, while targeting to add fresh items at 200 stores by fiscal year of 2016. Meanwhile, the stock recovered over 26.82% in just last four weeks and we believe this positive momentum to continue. Investors should also note that Metcash has an outstanding annual dividend yield of 11.83%. Based on the foregoing, we give a “BUY” recommendation at current price of $1.35.


MTS Daily Chart (Source: Thomson Reuters)
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