Company Overview - Woolworths Limited is an Australia-based company. The Company operates in five segments: Australian Food and Liquor, New Zealand Supermarkets, Petrol, BIG W and Hotels. Australian Food and Liquor segment is engaged in the procurement of food and liquor and products for resale to customers in Australia. New Zealand Supermarkets segment is engaged in the procurement of food and liquor and products for resale to customers in New Zealand. Petrol segment is engaged in the procurement of petroleum products for resale to customers in Australia. BIG W segment is engaged procurement of discount general merchandise products for resale to customers in Australia. Hotels segment is engaged in the provision of leisure and hospitality services, including food and alcohol, accommodation, entertainment and gaming.

Analysis - Woolworths (WOW) has been out with its first quarter sales results for FY15 14 weeks to 5 October 2014. The sales have been reported to be of the order of $16.2 billion, indicating an increase of 3.0% or 4.1% excluding Petrol. The Company has also launched new value campaign in Australian Supermarkets and is continuing well with its strategic priorities.  


First Quarter Sales FY15 (Source – Company Reports)

For said time frame, Australian Food and Liquor segment delivered sales growth of 3.9% on the previous year (sales of $11.0 billion). Trading was softer in August and September owing to growth affected by differences in the timing of promotional activities and the cycling of higher fuel discount activity.


Australian Food, Liquor & Petrol – EBIT Growth (Source – Company Reports)

The launch of ‘Cheap Cheap’ campaign at the end of the quarter helped reduce a number of prices on key household items. WOW also identified itself as the first Australian supermarket to reduce the price of white bread to 85 cents along with reduction in prices of other staple products. Customers benefitted from deflation in average prices of 2.0% for the quarter when the effects of promotions and volumes are included.


Fresh Food (Source – Company Reports)

The Launch of ‘The Fresh Food People’ in August provided the Company to be focused on being the first choice for Fresh food. Fresh sales for the quarter were better than Grocery. The Company further extended its ‘Farmers’ Own’ milk range to Western Australia in partnership with Margaret River dairy farmers.


Results – Full Year 2014 (Source – Company Reports)

The Liquor market has not been performing very well. Specifically, Beer and Ready-To-Drink categories have been meek with trading remaining highly competitive. Strong growth in Dan Murphy’s Online was noticed and launch of ‘Dan Murphy’s Connections’ provided customers with an extended range including products from boutique wineries, craft brewers and artisan distillers. The launch of the BWS ‘200 Specials’ campaign is expected to reap benefits in the second quarter. 

The nine (net) Australian Supermarkets opened during the quarter brought the total to 940, three (net) Dan Murphy’s brought the total to 189, and six (net) BWS stores brought the total to 1,222 (including both standalone and supermarket attached BWS stores).

There was a 4.5% decrease in Petrol sales with $1.8 billion of value on the previous year. Petrol volumes declined by 3.6% for the quarter and comparable volumes decreased by 5.2%. This was a pure play of reduced fuel discount activity following the undertaking to the Australian Competition and Consumer Commission (ACCC). The opening of six (net) petrol canopies during the quarter brought the total to 639, including 130 Woolworths/Caltex alliance sites. Nonetheless, the merchandise offer continued to deliver strong results with an 8.8% increase for the quarter.

The New Zealand Supermarkets’ sales (NZ$1.5 billion) increased by 1.1% on the previous year (5.6% increase in AUD) and were affected by price deflation and submissive grocery market conditions. The ‘Price Lockdown’ and ‘Price Drop’ campaign could help focus on value.


Group-wise EBIT (Source – Company Reports)

There was a 0.4% decrease in General Merchandise sales ($1.1 billion) on the previous year in view of the BIG W transformation lasting to affect results. In fact, the transformation will continue to adversely impact results in FY15. WOW reported that sales were affected by increased promotional activity in the current period to clear seasonal apparel following a warm winter and continuing price deflation. Nevertheless, there has been a positive comparable sales growth in Softgoods. Childrens-wear performed well with a positive Baby event along with the launch of ‘Peter Morrissey Kids’. The opening of a new BIG W store during the quarter brought the total to 183 and one new EziBuy store brought the total to five.

The Hotel sales ($399 million) decreased by 1.0% on the previous year or increased 0.5% excluding the impact of the additional Victorian gaming tax which came into effect from May 2014. Trading conditions in Victoria and Queensland remain difficult. WOW also reported that total countdown Supermarkets at the end of the quarter were 171 with total franchise stores remaining at 59. The Company opened one and closed two hotels during the quarter bringing the total number of venues to 328.

There was an outstanding 20.7% increase in Home Improvement sales ($472 million) on the previous year. In Masters, sales of $238 million increased 30.8% on the previous year, but were impacted by clearance activity as the Company started implementation of the changes such as refining of the range. The launch of the ‘Australia You’ve Been Paying Too Much’ campaign has been effective. Home Timber and Hardware yielded sales growth of 12.0% steered by various store refurbishments. The number of Masters stores at the end of the quarter were unchanged at 49. Home Timber and Hardware sales for the quarter were $234 million i.e., an increase of 12.0% on the previous year with positive results from store refurbishments. WOW completed the acquisition of Hudson Building Supplies (10 sites in New South Wales and five sites in Queensland) and Belmont Timber (one site in Victoria) at the end of the quarter. The Company now focusses on Spring trading program.

WOW continued to have a supportive Joint Venture partner in Lowe’s (although there was an increase in the quarterly loss ended 31 October 2014 for LOW). The ongoing commitment to the business has recently been further demonstrated through a modification to the terms of put option. WOW further mentioned that from October 2015, Lowe’s can issue a notice setting an exercise date for the option activating a 13-month notice period.


Online Sales Growth/ Sales Growth (Source – Company Reports)

The Online sales increased by more than 30% for the quarter. The Company has extended access to Click & Collect services, with BIG W and EziBuy orders being collected from selected Supermarket locations. New digital features such as ‘Track My Order’ GPS functionality has made shopping easier.


Innovative Offers (Source – Company Reports)

Overall, the Company expects to have improved momentum for its trading plans in the second quarter entailing the Christmas period. WOW also intends to come up with new range of fresh food initiatives to reinforce the Fresh leadership, continue to augment Dan Murphy’s and BWS customer sales and service capabilities, extend leadership in online segment, and make further efforts to lower prices in New Zealand for the benefit of customers.


Shareholder Payouts (Source – Company Reports)

The Company targets to enhance platform and operational activities to steer an increase in online traffic and sales. For the Australian Food, Liquor & Petrol, the gross margin increase has indicated improvements in buying, favorable shifts in sales mix and growth in exclusive brands. The Company has reinvested such benefits into lower prices for the customers. Innovative offers such as ‘Aussie Animals’ and ‘DreamWorks Heroes’ constitute other collectable campaigns giving WOW the platform for family engagement and creating customer loyalty.


WOW Daily Chart (Source - Thomson Reuters)

The recent announcement about WOW acquiring Summergate, a liquor distributor in China, is confirmed and will help the Company expand its distribution and profitability capabilities. Amidst the tough trading conditions even expected in FY15 in view of economic uncertainties, WOW still believes to have another year of growth with NPAT guidance of 4-7% in view of its capabilities and core strengths. In fact, the latest Caltex-Woolworths alliance changes also do not appear to have any major implications on WOW.

Accordingly, we put a BUY recommendation for this stock at the current price of $29.20.

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