Kalkine has a fully transformed New Avatar.

KALIN®

Woolworths Limited

Jan 16, 2017

WOW:ASX
Investment Type
Large-cap
Risk Level
Action
Rec. Price ($)

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 
Sale of Fuel Business and Strategic partnership with BP: Woolworths Limited (ASX: WOW) entered into an agreement with BP for the sale of their current 527 WOW owned fuel convenience sites as well as their 16 committed development sites that form part of the Fuel Business. The group would be selling the business to BP for $1.785 billion, subject to the regulatory approvals from Australian Competition and Consumer Commission (ACCC) and Foreign Investment Review Board (FIRB). The transaction is expected to be finished by January 2018. This is a part of the group’s Fuel Business divestment, while BP believes that this acquisition would get an edge for its business. With the funds from the sale, the group would strengthen their balance sheet and reinvest in the core businesses, which would further benefit the customers and shareholders. Moreover, the group believes that their relation with BP would enhance the convenience store offering. The partnership would leverage WOW’s successful and growing “Metro” format, which would facilitate the continuation of the 4 cents per litre (cpl) fuel discount offer. The agreement would also extend the Woolworths Rewards program which would enhance the value for WOW’s customers and reward them for their ongoing loyalty and support. There are attractive offers planned to enhance the sales through the “food-on-the go” and the roll out of “Metro at BP” concept, which is an extension of the existing “Metro” offer. The expansion of the “Metro at BP” format will be expanded across up to 200 sites, but this would happen in the second phase. On the other hand, the sale of the Fuel business is not expected to have a material impact on the WOW earnings. But, until the fuel business transaction happens, the customers of WOW would continue to be able to redeem their Woolworths 4cpl fuel discount offer at their current Woolworths/Caltex co-branded sites and participating at Caltex Starmart Alliance sites.
 
Redemption Agreement: WOW and BP would enter into a minimum 10-year Redemption Agreement to preserve and expand the 4cpl fuel discount offer, which is a key component of WOW loyalty offering. Under the terms of the Redemption Agreement, WOW and BP will commit to maintain and equally fund the issuance of the 4cpl fuel discount vouchers under the same conditions as of now. BP will maintain the 4cpl fuel discount offer at the existing 527 Woolworths fuel and convenience sites and as well as expand this offer to additional BP sites. This is expected to increase the proportion of WOW supermarkets with a nearby fuel redemption offer from approximately 75% today to approximately 80%. Moreover, WOW and BP have also agreed that mechanisms and incentives will be in place to maintain value for WOW’s customers. On the other side, Woolworthshad announced for the suspension of the Woolworths Notes II from quotation in November 2016 as per the listing rules.
 
WOW’s key priorities performance for the first quarter of FY 17: WOW in the first quarter of FY 17 has reported for strong Voice of the customer scores, improvement of Voice of the Team scores and Voice of the Supplier. 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 has in 1Q FY 17, reported for 1% growth in the total sales from continuing operations to $15,333 million. 

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% 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 enhanced significantly as compared to the corresponding quarter FY 15 and WOW has maintained the levels achieved in the fourth quarter of FY 16. In addition, WOW’s focus is on the lower shelf prices while the group 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 signs of progress in the Australian Supermarkets. 

Australian Food Operation Metrics in 1Q FY 17 (Source: Company Reports)
 
Agreement with Hills: Hills Limited and WOW had agreed to end the contract entered in December 2014, which licensed certain Hills Home Living brands to WOW for a period of seven 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. 

Group Strategy (Source: Company Reports)
 
Implementation of the new operating model: WOW has implemented the new operating model to further enhance the accountability into the business. For this model, 500 roles would be permanently removed from Support Office and Supply Chain, while 1,000 roles will be moved closer to stores and customers. BIGW has increased the control over the key levers critical to its turnaround. Meanwhile, 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, WOW focused on sales per square meter, ROFE and Relative TSR.
 
WOW’s outlook: WOW’s higher customer satisfaction scores are translating into improved sales momentum in Australian Food. The company’s focus for the remainder of FY17 is to build on the momentum while continue to execute against the five key group priorities. In addition, the financial performance for H1’17 has been said to be significantly depending on the sales performance over the Christmas period coupled with the impact of previously announced price and team hour investments in Australian Food and higher performance-based bonus accruals.
 
Stock Performance: WOW stock rose over 6.8% in the last four weeks (as of January 13, 2017) while the company has a decent dividend yield. The strategic partnership with BP is expected to bring BP’s global expertise and success in food and convenience offers to Australia. The customers of WOW would also be able to enjoy the combination with BP’s premium fuels, as well as a better loyalty program including the expansion of Woolworths’ 4cpl fuel discount offer. Meanwhile, despite the loss in the FY 16 financial performance, WOW is making progress in the rebuilding of their brand to fight against their peers. Moreover, WOW has begun the implementation of a new group operating model designed to reduce costs, increase the business accountability while enhance shared service delivery effectiveness. There is a record voice of the customer scores, improvement in the team engagement scores and there is a continued transaction growth, with item growth now positive. Woolworths has now appointed Claire Peters (a former Tesco executive) as managing director of Australian supermarkets. The stock improved 14.25% in the last six months (as of January 13, 2017) and the positive momentum in the stock is expected to continue in the coming months. We give a “Buy” recommendation on the stock at the current price of – $ 24.47
 

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.