Woolworths: Growth across the board

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
31 October 2019, 1:10 PM
Sectors Covered:
Industrials

  • WOW’s 1Q20 sales result overall was slightly weaker than we expected.
  • All operating divisions recorded like-for-like sales growth - Australian Food increased 6.6%, NZ Food was up 4.8%, Endeavour Drinks rose 3.2%, Big W increased 4.4% and Hotels grew 3.6%.
  • Management expects Australian Food sales growth to moderate over the remainder of FY20.
  • Our earnings forecasts remain largely unchanged.
  • Maintain Hold rating. (Morgans clients can login to view detailed reports and price targets)

Some positives and negatives

WOW’s 1Q20 sales result overall was slightly weaker than we expected withlike-for-like
sales for the core Australian Food business growing 6.6% versus our 7.2% forecast.

All other operating divisions delivered sales growth. However, NZ Food and Hotels performed above our expectations while Endeavour Drinks and Big W were weaker than forecast.

In addition, WOW said it had discovered an issue with staff underpayment in its supermarkets and metro stores.The issue affects ~5,700 staff and follows a review earlier this year after the implementation of the new Enterprise Agreement (EA).

WOW estimates a potential one-off remediation impact of A$200-300m (before tax) with the issue possibly going back to 2010.

Further details are expected at the 1H20 result in February.

Australian Food momentum continues 

Australian Food maintained its good momentum with 6.6% LFL sales growth.

While the result was softer than our 7.2% forecast, it was well ahead of Coles Supermarkets growth of 0.1%.

Sales were supported by the Lion King Ooshies and Discovery Garden promotional programs as well as online, which jumped 43.2%.

Growth also benefited from cycling a weaker pcp (1Q19 like-for-like sales +1.7%) which was impacted by the removal of single-use plastic bags and the successful Coles Little Shop campaign.

Looking ahead, management expects Australian Food sales growth to moderate over the remainder of FY20.

For FY20, we forecast Australian Food like-for-like sales to be up 4.9%. 

Big W maintains traction 

Big W LFL sales grew 4.4%. While growth was lower than our 7.0% forecast, it was nonetheless good to see continued positive momentum in the business.

The result was Big W’s sixth consecutive quarter of positive like-for-like sales growth driven by an improvement in all categories except for leisure.

Management also noted an improvement in sales mix which is supporting the turnaround of the business.  

Maintain Hold rating 

Despite negligible changes to earnings forecasts our PE-based target price rises. (Morgans clients can login to view target price)

We now value WOW on 25x FY20F PE which continues to represent a ~10% premium to COL.

We think this is justified given WOW’s stronger sales momentum, greater scale, higher margins and proven management team.  

More information

Morgans clients can login to view our detailed report and revised share price target for Woolworths (WOW). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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