Woolworths Limited (ASX: WOW) dominated the financial news headlines on Wednesday after its CEO, Grant O'Brien, shockingly resigned from his role on the same day the retailer issued its latest profit downgrade.
Indeed, the market's initial reaction was one of joy. The shares climbed nearly 3% despite the bad news, likely due to the fact that many investors had been calling for a complete management overhaul in relation to recent poor results.
But before investors even consider buying shares, there are a number of things that need to be considered, including these items:
- Who will take over as CEO? The company said that O'Brien will remain in the role until a replacement can be found, while a global search is underway (considering both internal and external candidates). It is strange that an ASX 20 company did not have a CEO succession plan to fall back on — especially considering recent circumstances.
- Will new management be good for Woolworths? Woolworths' current management team have admitted their mistakes in the running of the business. A change of leadership could be the catalyst for better operating results.
- Will Woolworths still implement its new strategies? In the announcement, Woolworths confirmed it was committed to implementing the strategic initiatives outlined at its recent investor day. Whether or not the new CEO should have a greater say in this is dependent on who you ask, and whether they see value in what Woolworths is trying to create.
- What happens to Masters? Management has stated that funds will be diverted from the home improvement division towards its core supermarket division. Woolworths has been all over the place in its strategy with Masters and many people would argue that it's time to pull the plug on the entire operation.
As Warren Buffett once said, "Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks." - Why is a 0.7% decline in Food & Liquor sales so bad? Food, Liquor and Petrol sales make up the majority of Woolworths' overall revenues. Given the sheer size of the corporation, a 0.7% decline is quite significant, and signifies a loss of further market share.
- Will there be any more profit downgrades? Woolworths has now issued two downgrades in the space of four months in the lead-up to its full-year results. It's unlikely to have any more bad news (at least not before it releases the results), although it could continue to disappoint in the months that follow.
- Will Woolworths' margins be hit? Woolworths' margins are considerably higher than those of its competitors, although this is largely due to its higher prices (making it less competitive). While it remains to be seen whether margins will be hit hard or not, the good news is management said they were on track to exceed the forecast $500 million in cost savings across the 2015 and 2016 financial years, while they also found ways to become increasingly efficient. That's a positive sign for investors.
- How about the dividends? Woolworths has an incredible track record for earnings and dividend growth. Unfortunately, it's now facing a 12% decline in full-year earnings (after significant items) and, if margins are impacted too heavily, we could see a decline in dividends at some point in the future, too.
- Is Woolworths a takeover target? My colleague Mike King answers that question, here.
- Is Wesfarmers next? Woolworths' primary rival Wesfamers Ltd (ASX: WES), the owner of Coles supermarkets, has plunged in price in recent months to trade around its 52-week low levels. Coles operates on thinner margins than Woolworths and, if Aldi does continue to steal market share, those margins could become somewhat compressed. This would be terrible news for Wesfarmers.
Woolworths Limited has, for a long time, been one of Australia's greatest and most reliable companies. Unfortunately, that has all changed over the last 12 months and investors are no longer sure what to make of the situation.
In my opinion, Woolworths isn't 'doomed', as some analysts are suggesting, but I do acknowledge there are a number of key issues that new managers must address. At roughly $26.50 per share, Woolworths could still be a great investment for investors willing to remain patient for the long term, although it could certainly fall beyond that price in the near-future based on the high level of uncertainty involved.
