The stock picker’s guide to Woolworths Limited in 2014

After a bumper year in FY2013 in which Woolworths Limited (ASX: WOW) grew net profit after tax by 6.1% and raised its dividend by 5.6%, this grocery giant continues to target double-digit profit growth in 2014.

Online sales and petrol retailing

Online sales grew by 42% (!) in FY2013, with Woolworths targeting $1 billion in sales for FY2014; a target it looks likely to reach with consumers downloading more apps every day. Over 3.2 million apps have been downloaded so far across Australia and New Zealand – a respectable number given that the population of our two nations together barely touches 26 million. Hopefully Woolworths continues to develop its online presence and uses its rewards programs to foster a loyal customer base.

Petrol income and volumes shrank slightly in 2013 owing to a lower average petrol price and reduced volumes caused by a flat fuel market and more fuel-efficient vehicles. However with Woolworths and Wesfarmers (ASX: WES) no longer heavily discounting petrol as of January 1 this year, I expect the average sale price of petrol to rise again. Even so, it is unlikely that petrol will be a driving force in Woolworth’s short-term growth and it remains to be seen what Woolworths intends to do with the business.

EziBuy, Quantium, and Masters

Tapping into the lucrative hardware market (Woolworths aims to have 90 Masters stores by FY2016) opens the company up to income from a sector separate from groceries, as well as taking arrows out of Wesfarmers’ proverbial quiver. If it wasn’t already obvious, Master’s stores are going to be essentially identical to Wesfarmer’s Bunnings outlets (even the webpages are similar) and should take a chunk of market share with relatively little sweat. You can read more about the competition between the two supermarket giants here.

Quantium is a data mining company, of which Woolworths is a 50% shareholder. What you buy, where you buy it, how much you spend, any trends in various food lines such as organic, gluten-free, etc, Quantium (and by extension, Woolworths) will find out. Low-fat diet items are selling well? Woolworths can expand their presence in stores. Did customer John Smith, who uses his Everyday Rewards card at the automated check-out machines, buy gluten-free bread the last 10 times he was in store, but not this time? Better flash him an automated reminder, possibly with a discount to encourage him.

In turn, Quantium could use Woolworth’s de-identified customer data to improve services to a wide range of other clients. I’m not suggesting that this is actually how Woolworths uses Quantium, but the applications are obvious. Bravo, Woolworths.

Finally we have EziBuy, a primarily online apparel and homewares retailer, purchased by Woolworths for NZ$350 million, that should begin to contribute to earnings in FY2014. It’s uncertain yet exactly what Woolworths intends to do with EziBuy, although management notes that there are synergies to be taken advantage of, so investors will have to wait and see.

Foolish takeaway

Basically, Woolworths ticks every box for 2014. The only reason I don’t own any yet is because I’m waiting out the current market volatility to see if I can get a better price. Woolworths belongs on your watch list too.

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