Company Overview - Woolworths Limited is an Australia-based company, which is engaged in retail operations. The Company's segments include Australian Food and Petrol, New Zealand Supermarkets, Endeavour Drinks Group, BIGW and Hotels. The Australian Food and Petrol segment is engaged in the procurement of food and petroleum products for resale to customers in Australia. The New Zealand Supermarkets segment is engaged in the procurement of food and liquor products for resale to customers in New Zealand. The Endeavour Drinks Group segment is involved in the procurement of liquor products for resale to customers in Australia. The BIGW segment is engaged in the procurement of discount general merchandise products for resale to customers in Australia. The Hotels segment is engaged in the provision of a range of leisure and hospitality services, including food and alcohol, accommodation, entertainment and gaming in Australia. The Company's brands include Essentials, Woolworths, Dan Murphy's and BWS.



WOW Details
WOW’s revamped first quarter of FY 17 performance indicates potential:Woolworths Limited (ASX: WOW) has introduced strong Voice of the customer scores, improvement of Voice of the Team scores and Voice of the Supplier in the first quarter of FY 17. There is an improvement in the Australian Food trading performance due to the growth in the customers (transactions), which resulted in the positive comparable sales growth for the first quarter of 0.7%. The relaunch of Woolworths Rewards has shown a material improvement in the customer satisfaction. Additionally, the Endeavour Drinks Group continues to gain share with sales growth of 3.8% in the quarter and the attached BWS stores benefitted from the improved supermarket foot traffic. In addition, the multi-year turnaround of BIG W is underway. Overall, WOW reported a 1% growth in the total sales from continuing operations $15,333 million during first quarter of FY 17. For fiscal year of 2016, WOW has reported their first annual net loss of A$1.2 billion ($913.6 million) as compared with a net profit of A$2.1 billion the previous year. The loss included a one-off charge of A$1.8 billion to quit a hardware joint venture with U.S.-based Lowe's Companies Inc.
 

First quarter of FY 17 Sales Performance (Source: Company Reports)
 
Australian Food delivered its first positive comparable sales growth since Q2 FY 15 in 1Q FY 17:In the first quarter FY 17, the group posted a 1.7% growth in the Australian Food sales to $9.3 billion, despite ongoing material price deflation. The comparable sales grew by 0.7% during the period due to the continued improvement in comparable transactions of more than 2.5% and comparable item growth of 0.5%. Additionally, the Voice of the Customer (VOC) scores has improved significantly as compared to the corresponding quarter FY 15 and WOW has maintained the levels achieved in the fourth quarter of FY 16. WOW’s overall customer satisfaction has been enhanced to 76% as compared to the 75% in the fourth quarter of FY16 while the store controllable VOC has been increased to 79% versus 77% in Q4 FY 16. WOW has also recently introduced Voice of the Team and Voice of the Supplier measures. However, the average prices have declined by 1.9% due to the material price reductions in groceries and bakery as compared to the same quarter last year and excluding tobacco, the average prices were down 2.8%. The fruit and vegetables also remained in deflation in the first quarter of FY 17 despite they moderated significantly as compared to the fourth quarter 0f FY16. However, the meat business, continued to absorb the significant cost price inflation during the quarter. But, WOW’s focus is on the lower shelf prices which continued with more than 600 additional items on the ‘Price Dropped’ and ‘Always’ programs since year end taking the total to 2,230 items. Therefore, WOW is seeing the clear signs of progress in the Australian Supermarkets. There is a record voice of the customer scores, improvement in the team engagement scores and there is a continued transaction growth, as the item’s growth are now positive.
 

Australian Food Operation Metrics in 1Q FY 17 (Source: Company Reports)
 
Caltex has confirmed to acquire WOW’s fuel business: Woolworths Limited’s (ASX: WOW) fuel business has received conditional and confidential proposal from the Caltex Australia. Caltex Australia is currently the exclusive supplier of petrol and diesel to WOW with annual sales volumes of approximately 3.5 billion liters per annum. This move indicates that they are on track to divest their non-core business to enhance their focus on the core business.
 
Agreement with Hills:Hills Limited and WOW have agreed to end the contract entered into on December 03, 2014, which licensed certain Hills Home Living brands to WOW for a period of 7 years after WOW’s plan to exit its Home Improvement Business. Therefore, WOW will pay an amount to Hills in settlement of all rights and obligations under the Licensing Agreement. WOW is also proceeding with the sale of Home Timber and Hardware and Masters inventory clearance by GA Australia.
 
Implementation of the new operating model:WOW has implemented the new operating model to further enhance their accountability into the business. In this, 500 roles are permanently removed from Support Office and Supply Chain, while 1,000 roles moved closer to stores and customers and BIGW has increased their control over the key levers critical to its turnaround. On the other side, WOW has implemented the revised short term and long term performance measures to drive the business transformation. Wow for short term measures focused on customers, team, sales, EBIT and working capital and for the long-term measures focused on sales per square metre, ROFE and Relative TSR. On the other side, the group’scommitment for greater transparency has come with disclosing Endeavour Drinks Group separately. The group has chosen Bega Cheese to manufacture and pack a range of its private label products including the cheese, UHT, adult milk powder and cream.
 
Management Changes:WOW has appointed new group portfolio director, and integrated the group functions back into businesses, exploring options for the sale of EziBuy and exit of home improvement. In addition, WOW has a new Group CEO, Brad Banducci who has taken tough decisions to put the company on track to become number one.
 

Operating Capex (Source: Company Reports)
 
Capital Management:WOW is committed for the solid investment grade credit rating and accordingly undertaking a number of actions to enhance the credit profile including the sale of non-core assets, as well as accelerated working capital initiatives and adjusting its growth capital expenditure and property leasing profile. WOW intends to redeem, in whole, all of the Woolworths Notes II on November 24, 2016. The WOW Notes II are expected to cease trading on the Australian Securities Exchange on November 15, 2016. The WOW Notes II holders who will be on the register at 7.00pm (Sydney time) on November 16, 2016, will be entitled to be paid on November 24, 2016 the redemption proceeds of $100 face value per Woolworths Note II, plus the final interest payment of $1.25523 per Woolworths Note II (which is the accumulated interest up to and including 23rd November 2016).
 
WOW’s outlook:WOW was able to get higher customer satisfaction scores which could translate into better sales momentum in Australian Food and the company’s focus for the remainder of FY17 is to build on the momentum and continue to execute against the five key group priorities. In addition, the financial performance for the first half of 2017 is mainly dependent on the sales performance over the key Christmas period and the impact of previously announced price and team hour investments in Australian Food and higher performance-based bonus accruals.
 
Stock Performance:WOW stock has risen 5.58% in the last one month (as of October 28, 2016) while the stock has a decent dividend yield. WOW has reported a decent performance in the first year of their planned three to five-years’ journey to regain the sales momentum. The group is constantly making required investments to attract more customers and trying to fight rising competition from Coles. Despite the loss in the FY 16 financial performance, WOW is making progress in terms of rebuilding strategy. Moreover, WOW has begun the implementation of a new group operating model designed to reduce costs, increase the business accountability and improve shared service delivery effectiveness. Based on the foregoing, we maintain a “Buy” recommendation on the stock at the current price of $23.65
 

WOW Daily Chart (Source: Thomson Reuters)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.