This morning, Woolworths Limited (ASX: WOW) released its annual report.
The market appears to have liked it, with shares in the retail giant closing the day around 1.5% higher.
However, there were some blemishes in the report.
Comparable sales in the Australian Food and Liquor business were up just 2.3%. This compares to the 6.6% reported by Coles, owned by Wesfarmers Ltd (ASX: WES). The business also reported a 2.8% deflation in average prices, on the back of its ongoing investment into lower prices for consumers.
Another bad spot was the final profit result, which was down 12.5%, to $2.15 billion. Sure, excluding some wishy-washy 'one-off' 'impairment' charges, which any ordinary person would probably consider just part of running a big business, profit would've been in line with last year's $2.45 billion.
Then there was the $224 million loss from the Home Improvement business, which includes Masters and Home Timber and Hardware.
General Merchandise, which includes BIG W, reported a fall 25% fall in profit (before interest and tax, and impairments), but frankly that amounts to just $38.9 million. Still, a reduction in profit is rarely a good thing!
Subsequent to the release of the annual report, Standard & Poor's Rating Services also revised down Woolworths' senior unsecured debt to BBB+ (stable outlook) from A- (negative outlook). This isn't the end of the world, but it's not a good thing either.
Anyway, enough of the negatives. Let's get to some positives!
3 key takeaways
- Margins in supermarkets widened! In the core business, profit margins (before significant items) widened to 7.2%, from 6.98% – I was expecting margins to shrink, not widen! Woolworths did say however that fuel prices helped bolster profit margins. Nevertheless, we'll take it.
- New leadership. Shareholders pressured, and the company answered. Chairman Ralph Waters will be replaced by an experienced executive, Gordon Cairns. His first point of call will be the appointment of a new CEO, following the resignation of Grant O'Brien.
- Competitive outlook. The company hinted at thinner profits by saying a more competitive environment will result in lower margins. Despite cutting a fair chunk of costs from the business, by accepting lower margins the group may be able to change consumers' perception of Woolworths and claw back market share. It's worth noting that Wesfarmers' Coles business has profit margins of just 4.67% – so Woolies may have some room to move on prices.
Other notable takeaways include the final dividend, improved performance of the new format Masters stores, and a resilient New Zealand Supermarkets business.
Is Woolworths a buy?
I'm yet to undertake a thorough update of my valuation of Woolworths shares, but at this stage I'm bumping up my DCF valuation to around $28.39 – from $26.44. In my DCF, I forecast profit margins within the all-important core division to drop to 6.5% in coming years.
Currently Woolies shares change hands at $27.46.
