Woolworths’ reporting numbers

Woolworths (ASX: WOW), one of the most divisive companies on the ASX in the analyst community, reported its profit numbers for the half-year this morning. Considering the regular commentary provided by the board under the new Chairman Gordon Cairns, the actual numbers themselves were somewhat overshadowed by the announcement of a new CEO finally.

As the company has been searching far and wide for a CEO ever since Grant O’Brien’s resignation last year, the announcement of internal successor Brad Banducci has come across as nothing short of underwhelming. The cynic will say that if he was the clear replacement then why the long search, but realistically if the market had been given this news last year the name probably would have been well received. There is no doubt Brad Banducci comes with good credentials and he is well-respected within the analyst community. One of the most respected fund managers in Australia, Hamish Douglass at Magellan, apparently was pushing the board for some time to elevate Mr Banducci and WOW is supposedly the only Australian stock in his portfolio so there is no doubt there will be some happy people once the dust has settled on the shock value of the appointment.

In fact, looking at the share price reaction tells this story well. Opening down 6% on the day, the stock is now up 4% in a fairly mediocre day. The task for Mr Banducci won’t be an easy one but it’s a simple enough job to see what needs to be done. In the face of rising competition WOW made the mistake of ramping up its gross profit margins rather than accept the fact that its competitors were serious threats. While we acknowledge that the attempted move into hardware made sense given the size of the market and the success of Bunnings, the move proved a distraction and attracted capital that was needed defending its main business.

Woolworths is still a business sitting on sales of $60bn and sales only down 1.4% on the half (down only 0.8% in same store sales), so while it feels like Armageddon the reality is that WOW is still in a position that most retailers would envy. But the trend is not in its favour and a change of culture is what is needed, and hopefully Brad Banducci is the man that can implement that change.

Net profit before significant items came in line with expectations at $933m, but the dividend was where the big surprise was as WOW cut it from 67c to 44c, below forecasts of 48c and a fall of 35%. Despite the large retail army remaining loyal shareholders and dependent on a fat dividend cheque, there’s little doubt right now that capital prudence is priority number one and that there are many improvements to be made that will need cash.