Woolworths slashes jobs and closes stores, but is it too little too late?
Although not held in the most recent Rivkin Blue Chip portfolio, WOW has been a regular feature in this portfolio in the past. As a very well recognised business in Australia, most consumers have an idea whether or not they like Woolworths as a place to shop but what about from an investment point of view? The share price performance hasn't been great over the last two years however the last month has seen a strong rally. The question is whether this is simply a 'dead cat bounce' or the beginning of a new trend.
After reaching a peak in 2014, the WOW share price has been trending downwards ever since. Pressure from Coles, as well as low cost foreign owned supermarkets like Aldi, have put pressure on WOW's margins and profits. The chart below shows that revenue growth flat-lined in 2015, possibly due to both strong discounting to remain competitive as well as loss of customers to competitors. Furthermore, WOW has had little success with its venture into home hardware through the Masters brand of stores. Masters has lost over $600m between 2010 and 2015 and expects to lose around $250m this year. WOW is currently considering bids for the sale of Masters as well as its other home improvement brand, Home Timber and Hardware (HTH). Home Timber and Hardware is awaiting ACCC approval to be sold to Metcash (MTS). The decision to cut these non-core, loss making businesses is perhaps a wise idea to allow WOW to focus on strengthening its supermarket brand.
After several periods of yearly revenue growth between four and seven percent, it is perhaps not surprising that 2015 was a flat year. Nevertheless, this is clearly a concern going forward as WOW fights to retain customers and closes stores. Despite the intense competitive pressures, gross margins actually continued trending upwards, reaching a five year high of 27.42% in 2015. The net profit margin of 3.5%, on the other hand, is well below the five year mean of 3.9%. A recent blog article we posted on Metcash highlighted that its net profit margin is currently only 1.5%, making WOW's figure look not so bad. Considering the margin pressure on supermarkets at the moment, WOW is doing well to maintain its margins at acceptable levels.
WOW yesterday announced significant restructuring in a bid to get the business back on track. Support office and supply chain roles will be reduced by 500, and a further 1000 people will be moved from group office into businesses. In addition, underperforming or unprofitable supermarkets will be closed. This will mean the closure of 30 stores with a further 34 on watch to decide whether to renew the lease at the end of the term. WOW has also recognised that its acquisition of EziBuy, a clothes and homewares retailer has not provided the expected synergies and will therefore be looking to sell it. In line with this, WOW will recognise a $309m after tax impairment on EziBuy. All of these changes are expected to lead to restructuring costs of $766m after tax although the majority of the charges will be non-cash. These charges come after $1.9bn in after tax write downs and provisions announced in February this year.
Despite the increase in write downs, the market clearly liked the announcement, with the share price closing up 8.2% yesterday. The plan obviously bodes well for the future profitability of WOW and indicates that management is willing to make difficult decisions for the good of the business. Guidance for FY16 results is for EBIT to lie between $2.55-2.57bn before significant items, a slight beat on analyst expectations of $2.51bn. While only a small beat, this will be the first time in a long time that results have beat expectations and could signal a change in trend. These results will be released on 25 August and will, for the first time, report earnings from its liquor business separately. This has increased speculation that the liquor business will soon be sold or demerged. WOW still has some way to go to bring the business back to its former glory but it feels like they are beginning to clean out the closet.
With a current net dividend yield of around 5%, a level that is near the highs for the past five years, WOW just barely missed out on being included in the Rivkin July Blue Chip Portfolio although it is currently held in the January and October portfolios. For those who don't know, the Rivkin Blue Chip portfolio holds ten stocks with a track record of high dividends, producing a steady income stream as well as benefiting from any capital appreciation that might occur. For more information please click here.