3 Supermarket Stocks – Woolworths, Wesfarmers and Metcash

Woolworths Ltd (ASX: WOW)

WOW Details

Efforts expected to translate into improved performance: In the last performance reporting for FY17, Woolworths had posted statutory NPAT of $1,533.5 million while sales from continuing operations before significant items were up 3.7% against prior year. WOW achieved sales momentum in Australian Food, with Q4’17 Easter adjusted comparable sales growth of 6.4%, and second half EBIT up 13% despite materially higher team incentive payments and investment in team member training. Then, Woolworths Supermarkets (with 995 stores) sales growth has continued at the back of customer transactions. The group’s gross profit from continuing operations (before items) as a percentage of sales surged by 35 bps over the prior year to 28.71% at the back of improvement in stock loss in Australian and NZ Food while continued price investment did pose some challenges. Woolworths now continues to focus on accelerating growth from digital and improving the customer home delivery and store pick up experiences in Food and Drinks. The group has also created WooliesX via integration of Digital and Loyalty to achieve the above in one way. While the group has reported that losses for BIG W might not go down in FY18 as WOW still intends to invest to improve the customer shopping experience, the group aims to restore the sales momentum in every possible way. WOW declared a final dividend of 50 cents leading to the full year dividend to 84 cents against the 77 cents of FY16. With regards to BP’s proposed acquisition of Woolworths’ 527 retail service station sites, the Australian Competition and Consumer Commission had proposed to grant conditional authorisation to roll out Woolworths discount programs to participating BP sites (subject to evaluating any anti-competitive effects) in August. It now seems that the final decision has been delayed at the moment.

It is worth noting that Woolworths has regained some of its momentum under the management of CEO, Brad Banducci, who has brought-in discipline in terms of the way WOW operates. Further, the group seems to enjoy the benefits from best store locations within Australia. WOW’s low-cost logistics network is also an add-on. While some headwinds are prevailing given Amazon’s entry in Australia, the stock has fallen about only 6% in last six months (as at October 03, 2017) and the group has been active in adopting strategies to mitigate the challenges. We give a “Buy” at the current price of $ 24.54
 

WOW Daily Chart (Source: Thomson Reuters)

Wesfarmers Ltd (ASX: WES)

WES Details

Challenges at Coles overweigh other positives: Wesfarmers’ statutory reporting reflected an increase in net profit for FY17 over FY16, and underlying net profit after tax also surged 22.1% to $2,873 million. The group’s full-year dividend per share also moved up to $2.23 from $1.86 in 2016. However, the group had reported for decline in profits in Coles supermarkets and losses in the United Kingdom and Ireland home improvement business, while earnings from the Industrial businesses, Kmart and Bunnings in Australia and New Zealand were found to be better. Coles business (with store network of 801 supermarkets) remains challenging at the back of sales and margin pressure given the competitive market scenario, and needs to focus on some turnaround strategies to enhance performance. At the moment, WES has undertaken many initiatives at Coles to deliver better products and services.

Performance at Coles (Source: Company Reports)

Recently, Wesfarmers’ director, Anthony John Howarth grabbed 141 direct ordinary shares in the group along with an increase in indirect interests. The group will announce its first quarter 2018 results in October 2017. We maintain an “Expensive” recommendation at the current price of $ 40.90


WES Daily Chart (Source: Thomson Reuters) 

Metcash (ASX: MTS)

MTS Details

Competitive pressure continues: This year, while Jeff Adams was appointed as Metcash’s Chief Executive Officer; the group witnessed a mix of achievement and challenges. Particularly, the Supermarkets business witnessed intense competition that resulted in continued price deflation. Supermarkets sales were seen to increase by just 1.3% to $7.65 billion in FY17, and were 0.6% lower excluding the 53^rd week. On the other hand, under the group’s ‘Best Store in Town’ initiatives, 100 additional stores completed the Supermarkets’ Diamond Store Accelerator program, bringing the total number of stores that have completed the program to 250. The group had reported for an underlying profit after tax for FY17 of $194.8 million, which is a 9.3% growth over the prior year (this excludes $22.9 million of costs related to the acquisition and integration of the Home Timber & Hardware Group, and other restructuring costs related to the business). MTS sales revenue was up 5.4% to $14.12 billion. The group now targets a dividend payout ratio of 60% starting FY18. On the other hand, the group expects a moderate growth in overall liquor market while sales in Food in the first quarter of FY18 are said to have been impacted by competitive pressure and difficult economic conditions in WA. Said headwinds are expected to stay for some time. We maintain an “Expensive” recommendation at the current price of $ 2.45


MTS Daily Chart (Source: Thomson Reuters)

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