In morning trade the Woolworths Group Ltd (ASX: WOW) share price is edging higher.
At the time of writing the conglomerate's shares are up slightly to $36.75.
Why is the Woolworths share price edging higher?
Investors have been buying Woolworths' shares this morning after the release of an announcement.
According to the release, Woolworths is planning to develop an automated regional distribution centre and a semi-automated national distribution centre at Moorebank Logistics Park in Sydney.
It expects the construction to be completed by the end of calendar 2023, with initial benefits expected to be realised in FY 2025.
These new facilities will eventually replace the current ambient grocery operations at Woolworths' Sydney Regional Distribution Centre in Minchinbury, Sydney National Distribution Centre in Yennora, and Melbourne National Distribution Centre in Mulgrave. The current temperature controlled fresh food distribution will continue to be serviced out of the Minchinbury centre.
What will this cost?
This is certainly going to be a big investment for the company. It expects to invest $700 million to $780 million in technology and fitout of the two distribution centres over the next four years and has signed an initial lease term of 20 years with Qube Holdings Limited (ASX: QUB).
Pleasingly, it intends to fund this investment through its existing capital expenditure framework and does not expect it to materially increase its levels of operating capex spend over the period of construction and installation.
All the hard work should be worth it, though. Management expects the centres to deliver a significant reduction in its supply chain costs over time and deliver strong returns above its cost of capital.
Woolworths CEO, Brad Banducci, commented: "Moorebank will transform the way we serve our NSW grocery customers. The new facilities will advance our localised ranging efforts, with the ability to hold over 30% more products than existing facilities. Automation will allow the creation of aisle-specific pallets by store, and in doing so, reduce the time to restock shelves and result in better on-shelf availability for customers."
"We have learnt a lot from our MSRDC development, which is delivering against its business case and this gives us the confidence that now is the right time to invest in our NSW network," he added.
The company intends to support team members at sites that will close. And given that it will be a number of years until these closures, it notes that it has the opportunity to explore meaningful redeployment opportunities for impacted employees.
Significant items.
Management has advised that the decision to proceed with the supply chain transformation will result in a one-off pre-tax cost of $176 million. This will be recorded as a significant item in FY 2020.
Which, combined with Endeavour Group transformation costs and employee remediation, brings its pre-tax significant items to $591 million for FY 2020.
Trading update.
In addition to the above, Woolworths has provided a trading update for the 10 weeks ending 14 June 2020.
That update reveals that the company is having a particularly strong finish to the year.
Compared to the prior corresponding period, Australian Food sales are up 8.6%, NZ Food sales are up 15.1%, BIG W sales have jumped 27.8%, and Endeavour Drinks sales are 21.4% higher.
Mr Banducci commented: "Trading has remained strong in Q4 to date, with the exception of Hotels where venues were closed until the end of May and have just begun to enter different stages of reopening. In Australian Food and Endeavour Drinks, sales growth improved in May and June following a more subdued April impacted by unusual trading patterns around Easter and Anzac Day."
Full year guidance.
In light of this strong finish to the year, Woolworths currently expects to report earnings before interest and tax (EBIT) (post-AASB 16 and before significant items) of $3,200 million to $3,250 million. This compares to $3,290 million in FY 2019 on a 53-week basis.
The main drag on its performance this year has of course been the closure of its Hotels. Hotels EBIT is expected to be $160 million to $170 million, less than half of the $355 million it recorded last year.
