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What will the new Woolworths Limited CEO do?

Well, the market certainly liked the news today that Woolworths Limited (ASX: WOW) CEO Grant O’Brien was stepping down.

Despite a profit downgrade for the Australian Food & Liquor (AFL) division, huge falls in same stores sales for Big W and disappointing same-store sales growth in the past few months, shares in the supermarket retailer have gained in early trading.

The market obviously felt that fresh management would be able to turn around several aspects of Woolworths’ business, and current management weren’t up to the task.

These are some steps the new CEO might want to consider:

Cut profit margins to become more competitive

Clearly, the market sees Woolworths as over-priced, and that shows up in the supermarket’s earnings margin. When 75% of Australians say they are concerned about their food and grocery expenses, the market is telling supermarket retailers that cheaper prices are a necessity.

A recent survey by consumer group Choice found Woolworths to be the most expensive, although not by much compared to Coles – owned by Wesfarmers Ltd (ASX: WES). But compared to Aldi, a basket of typical items was roughly double the price. Ok, they were branded items, and people will obviously spend more to buy the brand names they trust, but will they pay twice as much?

Woolworths vs Coles EBIT margins

Source: Annual reports

Is it any wonder that Coles is posting strong quarterly growth when it’s obviously offering cheaper prices?

Fix Masters

I doubt a new CEO will abandon the Masters hardware concept. Remember that it only generates roughly half of Woolworths’ Home improvement revenues, with the other half coming from Home Timber and Hardware stores. Home Timber is profitable at an earnings before interest and tax (EBIT) level, so Woolworths might need to consider rebranding Masters as Home Timber and Hardware, and focus on making Masters more appealing – like competitor Bunnings.

My personal experiences at Masters haven’t been great, empty car parks and stores on weekends and inexperienced staff. That’s vastly different to my experience at Bunnings. If that’s anything to go by, then a new CEO has plenty of hard work ahead to turn Masters around. A new format may help as announced today, but that’s clearly only one small step in the right direction.

Big W

After reporting a 12% decline in comparable sales for general merchandise primarily caused by the installation of a new merchandising system, Woolworths clearly needs to do something about Big W. The whole discount department store sector has been flat since 2009, with Wesfarmers’ Target particularly suffering. Specialist retailers are now providing higher levels of competition, including online-only retailers.

The problem the new CEO has to consider is whether to continue with the category of general merchandise, but at the recent investor strategy day the company outlined several steps it was taking to turn around Big W. At this stage, the business is expected to return to profit growth in 2016 financial year. If it doesn’t, it will be interesting to see what the new CEO does.

Foolish takeaway

I expect a new CEO to take drastic steps in the short term. New CEOs typically like to start with a clean slate and investors might want to brace themselves for more writedowns and lower profits in the short term. A cynic might even suggest that the CEO does that to make the company’s improvement afterwards ‘appear’ more stellar.

The simple fact is that Woolworths has lost its way but the company is not as broken as many seem to think. As a long-term shareholder, I’m definitely not selling out yet.

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Motley Fool contributor Mike King owns shares in Woolworths. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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