Woolworths Limited (ASX: WOW) has named former Lion Nathan chief executive Gordon Cairns as its new chairman and non-executive director in conjunction with its weakest profit result in recent history.
For the year ended 30 June 2015, overall group revenue declined by 0.1% to $61.15 billion (partially as a result of a 2.8% reduction in its average supermarket prices), while its reported net profit after tax (NPAT) was down 12.5% compared to the prior year at just $2.15 billion. Stripping out the impact of one-off items such as impairments, NPAT was in line with the prior year's result at $2.45 billion.
The supermarket behemoth's year has been plagued by a number of serious issues, including intense competition from Coles and Aldi in its core Australian supermarket division; losses that are piling up from its Masters Home Improvement venture; and questionable managerial decisions. With plenty to cover, let's get straight into it.
Management
A company's Board of Directors is responsible for strategy, with Woolworths' Board openly admitting they have made mistakes with the direction of the company. The group's CEO, Grant O'Brien, announced his resignation earlier this year (pending the arrival of a new CEO) while there have been calls for an overall Board shake-up, too.
Gordon Cairns will lead the change, replacing the group's current Chairman, Ralph Waters, at the head of the company. Cairns has extensive experience for the role, currently acting as chairman of Origin Energy Ltd (ASX: ORG) (amongst several other senior roles at various other corporations) while he is the ex-chairman of fellow retailers David Jones and Rebel Group.
Indeed, a change in management could be just what the company needs following a disappointing 12 months. He said that: "the most immediate issue is to identify new leadership to take the business forward" and that the CEO search is progressing well.
Results
During FY15 earnings (before interest and tax, or EBIT) from the group's Australian Food, Liquor & Petrol division rose just 2.1%, compared to a far more impressive 6.6% growth for Coles, owned by rival Wesfarmers Ltd (ASX: WES). Woolworths has already spent more than $200 million in price reductions during the second half of the year in order to become more competitive on this front, which is vital to the long-term success of the business.
Although margins remained mostly in line with the prior year, I expect that will change during FY16, and likely in the first half of the year. The company said (emphasis added): "While we enjoy significant competitive advantages, a more competitive environment will result in lower margins as we invest to improve all aspects of the customer offer, notwithstanding gathering momentum in operating efficiencies".
Big W also acted as a drag on the group's earnings with EBIT from the General Merchandise segment down a whopping 25.3% to $114.2 million. Those issues were still present at the beginning of the current financial year, with comparable sales down 8.9% so far in FY16.
The group also reported a 23.7% lift in sales from its Masters business and said that 20% of its stores are now under the new format, which is showing an average sales per store of more than 30% higher than the original format stores. That's something investors will like to see, although the business still posted a $245.6 million loss for the year.
What happens now?
Woolworths said that comparable sales in its Australian Food & Liquor division had declined 0.9% in the first eight weeks of this year, although it is hopeful of an improvement in momentum.
The company will continue to transition towards its Lean Retail Model, which it outlined at an investor day earlier this year, while its cost savings are tracking ahead of its stated target of more than $500 million. However, it said:
"FY16 will bear the impact of our decisive response to the competitive environment to meet our value commitment to customers with our investments in price, service and experience exceeding cost reductions in this period. We are committed to making the right long term decisions for our customers and shareholders."
Short-term traders will likely grow anxious at the mention of a contraction in margins and further earnings pain in the next 12 months, but that could be just what the group needs to succeed in the long-run. Indeed, the competitive landscape is increasingly intense and Woolworths needs to show that it offers lower prices to keep and win back customers.
As expected, the company declared a final dividend of 72 cents per share, taking its full-year dividend to 139 cents per share. At its current share price, the company offers an attractive 5.1% fully franked yield, and could be a great investment prospect for those investors willing to remain patient.
