Chart: The 7 ways Woolworths Limited makes money

Credit: Woolworths

The last two years have been a struggle for shareholders of Woolworths Limited (ASX: WOW). A light has been shed on what was once considered to be one of Australia’s greatest businesses by revealing a number of underlying weaknesses that have made many investors doubt Woolworths’ prospects.

Some extremely questionable decisions made by management in recent times have caused plenty of damage to the business itself.

To begin with, it pumped billions of dollars into its unprofitable Masters home improvement venture (before eventually pulling the plug earlier this year), while it also focused relentlessly on margins in its supermarkets, which ultimately drove customers away in search of cheaper alternatives.

The overall result for shareholders? The shares have crashed nearly 40% since their 2014 high of $38.92, while the group has also cut its dividends.

Here’s a chart showing how the group generated its income in FY15. It will be interesting to see how this will have changed when the group releases its full-year earnings report for FY16 on 25 August 2016, although the vast majority of sales will still come from Food & Liquor.

Source: Woolworths

Source: Woolworths

One glance at the chart above shows how dependent Woolworths is on its Australian Food and Liquor segment. When combined with Australian petrol, the segment accounted for around 78% of revenue for the 2015 financial year and a whopping 92% of group earnings before interest and tax (EBIT).

As such, it’s easy to see why the business’ bottom line has taken such a hit from declining comparable sales growth in its supermarkets, exacerbated by significant operating losses at its Home Improvement (Masters and Home Timber & Hardware) division.

Woolworths is in the process of restructuring its business in order to compete better with rivals such as Coles – owned by Wesfarmers Ltd (ASX: WES) – as well as Metcash Limited’s (ASX: MTS) IGA and German discount retailer Aldi. It’ll be a long and arduous process, but it appears to be making progress and will hope more customers start returning to its stores in the not-too-distant future.

It will also slow its rollout of new supermarket stores, reduce its employee base and consider the potential sale of its EziBuy business. Meanwhile, Woolworths called an end to its Masters venture in January 2016 and is in the process of finding a buyer for Home Timber & Hardware.

The results reported by Woolworths throughout FY16 dictate that investors shouldn’t expect anything miraculous when it reports its full-year earnings in August. Although investors responded positively to the group’s latest update, it might pay to hold off from buying the shares just yet and wait for more positive results in the periods ahead.

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Motley Fool contributor Ryan Newman 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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