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Woolworths Limited shares rocket despite profit crash

Credit: Woolworths

2016 was a very expensive year for Woolworths Limited (ASX: WOW). Profits plunged, the dividend was cut, and shares lost 8% of their value. Management is implementing a turnaround strategy, but will it be enough?

Here’s what you need to know:

  • Total Group sales fell 0.8% to $60.2 billion
  • Net Profit After Tax fell 157% to a loss of $1.2 billion
  • Losses per share of 98 cents per share
  • Dividends per share fell 45% to 77 cents per share
  • Return On Funds Employed fell from 22% to 18%
  • Restructuring impacts of $2.5 billion due to impairments, Masters closures, and restructuring
  • Outlook for continued focus on improving operations, no financial guidance provided due to ongoing uncertainty

So What?

The Masters venture has proven to be more expensive than many would have imagined, and the amounts Woolworths will recover from it are quite small. Masters will close for good in December this year and will be split into pieces and sold off.

Metcash Limited (ASX: MTS) has purchased the Home Timber and Hardware division, while another buyer has lined up for the Masters sites, and a third will take care of Masters’ inventory. Woolworths will keep three freehold sites and take over 12 leases.

With liquor, supermarkets, and Big W now the main game for Woolworths it was interesting to see management’s ‘warts and all’ presentation of the headwinds facing supermarkets and Big W. The accompanying results presentation is well worth a read but in short both supermarkets and Big W will be overhauled with a focus on simplification, productivity, and customer service. A number of stores will be refreshed, there’s an IT upgrade in the works, and all staff will be progressively retrained.

There’s also been a rethink of the Everyday Rewards program and management reported that customers seem responsive so far with a number of customer satisfaction metrics improving. Total grocery sales declined though and the initiatives have led to weaker margins and a significant increase in the cost of doing business.

Liquor, NZ supermarkets, and hotels continue to trade well.

Now What? 

I take my hat off to management for their open admission of a number of problems in today’s results, and it’s become apparent that Woolworths has a lot of work to do. However, none of the initiatives it’s focusing on are new or revolutionary – which is good, because things like removing management layers, improved branding, better customer service and so on are simple, achievable, and have a long track record of success. I like this because it suggests that Woolworths’ problems are reversible. Improved operations could see the company’s dividends back on track and Woolworths remains a well-funded, defensive business.

The downside is that it’s up against Wesfarmers Ltd (ASX: WES) which appears to be already several steps ahead of Woolworths in terms of service and product offering. Wesfarmers’ management also noted in their results yesterday that they were increasing their investment in the supermarket space because of the attractive returns on offer. Woolworths’ turnaround appears to be enjoying early success, and the company appears attractive for its dividends, but competition is fierce and I don’t think it’s a standout buy today.

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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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