WHAT'S HAPPENING WITH WOOLWORTHS ?

       WOW Dividend Details
 
Investments to lower prices paid off as of now:

Woolworths Limited (ASX:WOW) Australian Food and Liquor sales segment rose by 0.4% year on year (yoy) to $11.1 billion driven by the group’s extra price investments of over $100 million during the first quarter of 2016, leading to decrease in average prices of 1.8% (across categories like groceries, produce, bakery and general merchandise). However, the total first quarter sales have witnessed a sliding by 2.5% to $15.74 billion from $16.15 billion of previous year.
The group opened six new Australian Supermarkets during the quarter resulting to a total of 967 Australian Supermarkets, three Dan Murphy’s totaling to about 200 as well as seven BWS stores totaling 1,254 BWS stores (comprising standalone and supermarket attached BWS stores). But the group’s comparable store sales reduced by 1.0% during the quarter. However, WOW is making efforts to enhance customer experience and has invested on service as well as loyalty to drive shopping experience.
 

New Stores and refurbishments in 1Q16 (Source: Company Reports)
 
Woolworths-Caltex alliance changes affected Petrol Performance:

Petrol sales plunged to $1.3 billion during 1Q16 from $1.8 billion in prior corresponding period (pcp), impacted by the changes in Woolworths/Caltex alliance as WOW in not recognizing Caltex operated site sales. Moreover, average fuel sell prices decreased by 10.6% during the quarter posed further pressure. Comparable sales fell by 12.2% and comparable volumes also declined by 2.3%. On the other hand, the segment’s Merchandise sales rose by 10.0% during the quarter while comparable merchandise sales improved by 7.2%, boosted by solid in-store promotions and seasonal product. Meanwhile, the group estimates its second quarter petrol sales also to be subdued due to alliance changes.
 
Price promotions drove New Zealand supermarkets performance:

WOW’s New Zealand Supermarkets’ sales rose by 3.9% yoy to NZ$1.6 billion, and comparable sales surged 2.5% yoy driven by price decrease programs as well as positive domino Stars collectables promotion impact. The group added 595 products during the quarter, to improve its customer base and market share. Overall Countdown Supermarkets reached 180 wherein total franchise stores were 60 during the quarter.
 
General Merchandise and Hotels segments’ highlights:

General Merchandise sales reduced by 7.9% during 1Q16, impacted by the group’s unproductive inventory clearance while the comparable sales fell by 8.1%. The group enhanced its core categories and witnessed a better sales trend in October. Overall BIG W and EziBuy stores were 185 and five respectively by the end of the quarter. On the other hand, WOW’s Hotel sales improved by 3.3% yoy to $412 million, driven by ongoing solid performance at New South Wales while comparable sales rose 2.0%. Overall Hotel venues reached 331 by the end of the quarter.
 
Masters Performance and Speculations:

WOW’s Home Improvement sales surged 20.3% to $568 million during the quarter driven by Masters Sales which rose by 23.5% on previous year to $294 million. The group opened four stores in new format as well as finished a renovation of one store in Victoria. The group aims to have half of its stores in the new format by the end of FY16. New stores opened or renovated in FY15 delivered 30% better average sales per store than the original format. Meanwhile, Home Timber as well as Hardware sales for the quarter rose 17.1% yoy to $274 million boosted by sales from recent store acquisitions.
Recently, numerous speculations about the exit of the division have been made given a poor track record and the EBIT loss of $246 million in FY15. But it seems that WOW may not be revealing much of its plan for the division in view of the Christmas period approaching ahead. Market believes that WOW may be able to generate about $3 billion of cash with a lowering in net debt to about $500 million in FY17 based on the sale of Big W and Master.
 


Overall performance by Segment (Source: Company Reports)
 
Issued a weak guidance for first half of 2016:

Woolworths management, at the back of expecting long term growth, cautioned investors on the short-term consequences due to the group’s growth efforts across all of its businesses and reported that there would be an impact on its business during the first half of 2016 based on increased investments. Accordingly, management estimates that Net Profit After Tax (NPAT) to be in the range of $900 million to $1.0 billion for the first half of 2016 which is 28% to 35% lower than first half of 2015 NPAT before significant items. On the other hand, the company is also bringing changes to its loyalty program to introduce 'Woolworths Dollar' earning scheme based on purchases of products at Woolworths and has ended its Frequent Flyer points’ program. Of course execution risks do prevail but can be outweighed if WOW also focusses on its marketing capability.
 
Stock Performance:

Woolworths reported a modest sales increase (excluding Petrol) of 0.8% to $14.4 billion during first quarter of FY16. On the hand, the group is focusing on its core Food and Liquor business and investing on price, service as well as loyalty in order to deal with excessive competition. Accordingly, WOW’s key customer metrics like Net Promoter Score have also witnessed improvement from the start of the year. Meanwhile, WOW stock fell over 2.9% (as of Oct 29, 2015) in last four weeks and is trading close to its 52-week low price. The group also has a decent dividend yield of 5.77%. We believe that with the recent result, WOW still seems to put great efforts to be on a growth trajectory on a long-term basis although short-term challenges do prevail. Accordingly, we maintain our “BUY” recommendation at the current price of  $24.11.
 

 

WOW Daily Chart (Source: Thomson Reuters)

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