Three Supermarket Stocks - Should You Invest?

Woolworths Limited

WOW Details
Reasonable growth during challenging market conditions:For Q3FY17, Woolworths (ASX: WOW) reported a moderate sales growth of 3.7% year on year (yoy) to $13.8 billion, led by strong momentum in Australian food division with 5.1% yoy growth to $9.3 billion. Further, the company is expecting a significant ramp-up in supermarket renewals run-rate with 49 planned for H2FY17.  During the quarter, Australian Food witnessed significant improvement in voice of customer (VOC) scores compared to Q3FY16, wherein the overall customer satisfaction and store-controllable VOC increased to 77%, 80%, respectively. Additionally, the company’s online sales posted strong growth of 20% yoy during the same period. Notably, the transaction growth remained the biggest driver of growth with comparable Easter adjusted transaction growth of 4.1%.  However, average prices declined by 2.5% during the quarter, largely driven by general merchandise and grocery, while the fruit & vegetable prices were marginally inflationary.  Though the meat prices continued to decline against Q3FY16 despite higher input cost prices, fruit & vegetable volume growth remained strong during the quarter. The company ended the quarter with 978 Australian Supermarkets and 23 metro food stores as it closed three and opened two supermarkets during the quarter.
 

Q3FY17 sales (Source: Company reports)
 
BIG W sales impacted by inventory clearance activities: Despite subdued market growth during the quarter, company’s key retail businesses, BWS and Dan Murphy’s, delivered positive Easter adjusted comparable growth driven by strong execution around key events and a continued focus on competitive prices. The company opened one Dan Murphy’s store during the quarter bringing the total fleet to 216 and opened four BWS stores while closing one, ending the quarter at 1,295 stores. New Zealand food sales increased by 4.3% yoy driven by continued activity on price, service, and local ranging, as well as from the beneficial partnership between onecard loyalty program and AA smartfuel launched in Q2’17. BIG W sales were impacted by deflation due to apparel clearance activities to make way for new season apparel. Although the BIG W turnaround strategy is in place with tactical initiatives already progressing, it remains a multi-year turnaround due to the investment undertaking as part of revised plan and expects it to report a loss before interest and tax of $115-135 million for H2FY17. Currently, the company is focusing on rebuilding sustainable sales momentum for the remaining FY17 and into FY18. However, H2FY17 is expected to be impacted by higher costs in key areas such as team incentives, depreciation and team training. Given the sales data and turnaround of BIG W coupled with further cost efficiencies going forward, the stock is expected to witness momentum. The competitive environment does prevail, but the stock seems to have good value and has been able to outpace Coles recently with the latest sales result. WOW stock has moved up 5.6% in last three months (as at May 16, 2017). We give a “Buy” recommendation on the stock at the current market price of $ 26.24


WOW Daily Chart (Source: Thomson Reuters) 

Wesfarmers Ltd

WES Details
Retains Officeworks: Post internal analysis, Wesfarmers Ltd (ASX: WES) has decided against the potential IPO for the Officeworks as it might not generate value at the moment and may also not benefit the shareholders. The group has thus announced for retaining the division and believes it to be poised for future growth. For Q3FY17, Coles headline food and liquor sales increased by 1.2% only, at the back of investments in the customer offers/discounts. However, Bunnings Australia and New Zealand achieved sales growth of 7.7% owing to robust growth achieved in prior periods through the continued solid execution of its strategic agenda. The group made further progress on transition, separation and integration activities in the United Kingdom and Ireland, following the Homebase acquisition. Further, following the successful launch of the first Bunnings pilot store in February 2017, the second pilot store was opened in Hatfield Road, St Albans on 12 April 2017. Total sales from Kmart increased 2.5% with further price investments made during the period. Target division recorded a decline in total sales of 18.1% and is transitioning to everyday low prices. However, inventory quality has remained strong and positioned well for the remainder of the financial year.
 

Third Quarter Sales (Source: Company Reports)
 
The stock performance for the last three months edged slightly up while the stock moved up about 7% over the past six months (as at May 16, 2017). Buying the stock only for the dividends offered may not be of a great choice as the group is managing the dividend from the balance sheet and the dividend payments have been declining over the past few years. Given the intense competition in the industry, challenging business environment (at the back of soft consumer spending) and added headwinds in the form of new entrants, we give an “Expensive” rating on the stock at the current market price of $ 43.36


WES Daily Chart (Source: Thomson Reuters) 

Metcash Ltd

MTS Details
HTH’s integration to be completed by the end of FY18:For H1FY17 ending 31 October 2016, Metcash Ltd (ASX: MTS) reported a marginal revenue growth of 0.3% yoy to $6.63bnwhile posting a 4.2% decline in EBIT to $128.1m, as the sustained earnings growth in the liquor and hardware division was more than offset by lower earnings in food & grocery division. Further, underlying profit after tax declined 4.7% to $82.8 million primarily due to the decline in group EBIT. The group had generated strong operating cash flows of $130.6m with continuous sale of non-core assets which further generated a $27.2 million in cash. The positive cash flows together with the $92.8m of equity raised to fund the HTH acquisition, resulted in net debt reducing to $197.6 million. Importantly, the acquisition of HTH (completed in October 2016), created a ~$2 billion hardware business as the second largest market participant in the sector with servicing a retail network of ~750 bannered stores and a further ~500 unbannered stores. The integration of HTH is progressing well and the business is expected to be fully integrated by the end of FY18. MTS expects continuous positive momentum from liquor for the remaining FY17 while the earnings from the food & grocery business is expected to be more than H2FY16 despite significant headwinds. Further, H2FY17 is expected to benefit from an additional trading week, cost savings, as well as the repositioning of the convenience business which is expected to generate a positive EBIT in 2HFY17. The stock has moved up 16.8% and 10.9% over the past twelve months and six months, respectively (as at May 16, 2017). However, subdued sales coupled with increasing industry headwinds may pose a pressure. We give an “Expensive” recommendation on the stock at the current market price of $ 2.06
 

MTS 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.