Why the Woolworths Limited share price is going nuts today

Fruit market

Some time ago, Woolworths Limited (ASX: WOW) announced an operating review to arrest underperformance and return the business to sustainable operating performance. Investors will be aware of the recent decision to close the Masters Hardware chain, but today’s operating update reveals more of Woolworths’ strategy going forwards.

Here’s what you need to know:

  • $959 million in restructuring costs, of which $388 million will be cash to be recognised in the Financial Year 2016 results
  • New operating model to drive improved accountability and performance, with 1,000 staff moved out of the group office
  • A further 500 positions cut from support office and the supply chain
  • Sales per square metre and Return on Funds Employed introduced as long-term performance indicators
  • EziBuy separated from Big W (with a $309 million impairment), investigating potential sale of EziBuy
  • New Australian supermarket rollouts slowed with underperforming and unprofitable stores to be closed

So What?

As readers can see, Woolworths continues to use the axe on under-performing businesses and unnecessary costs. Unfortunately the EziBuy acquisition only occurred a couple of years ago and it appears management was unable to make it work. The rampant rollout of new stores has also slowed as Woolworths looks to cut its losses and jettison unnecessary baggage.

Although the write-downs are hefty, Woolworths generates more than $1 billion dollars in operating cash every six months and, while the report won’t be pretty, the company’s viability also isn’t threatened by the charges.

The introduction of sales per square metre and Return on Funds Employed will drive a new level of accountability, and provide a simple benchmark for evaluating performing or under-performing stores. It’s surprising they haven’t been introduced before this, although sales per square metre is traditionally used in more conventional retail stores like Big W.

A decision to cut back office staff and in particular transfer said staff out into businesses bodes well for better communication between business and corporate functions. Basically, it looks as though CEO Brad Banducci is saying everything we do has to directly contribute to the company’s purpose, which is selling groceries/liquor/etc.

Now What?

A tip of the hat to Mr Banducci for making the tough decisions, although shareholders must ask themselves if this will contribute to better supermarket sales in the future. While lower costs will improve the bottom line, there’s only a fixed amount that can be cut or automated and investors shouldn’t expect savings of similar magnitude in the future. The potential for Wesfarmers Ltd (ASX: WES) and Metcash Limited (ASX: MTS) to steal a march on Woolworths shouldn’t be overlooked, especially since Mr Banducci told investors that Woolies turnaround would be a ‘three to five year journey‘.

On the plus side, management also reported that their metrics for team engagement and customer satisfaction have been improving, and also that there has been some growth in customer transaction values. It’s early days yet, but it’s pleasing to see results so soon.

In the meantime, investors are likely better off leaving Woolworths on the shelf and checking out this top-notch dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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