Woolworths: Lockdown benefits diminishing

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
28 October 2021, 8:30 AM
Sectors Covered:
Industrials

  • Woolworths' (ASX:WOW) 1Q22 sales update was mixed and overall was slightly weaker than we expected.
  • LFL sales: Australian Food +2.7% (vs MorgansF +4.5%), NZ Food +9.0% (vs MorgansF +6.0%) and BIG W -16.8% (vs MorgansF -17.0%).
  • For October to date, WOW said sales have slowed in Australian Food as NSW lockdown restrictions eased while BIG W sales trends have improved as Sydney stores reopen.
  • We decrease FY22F underlying EBIT by 1% to A$2,898m while underlying NPAT falls by 2% to A$1,597m.
  • Our target price declines to (login to view) and we maintain our Hold rating.

Australian Food sales growth was below our expectations

LFL sales growth for the key Australian Food business of 2.7% was lower than our 4.5% forecast. Growth was driven by higher in-home consumption due to extended COVID lockdowns in NSW and VIC, additional online capacity and a successful Woolworths Bricks collectibles campaign. Encouragingly, management said sales growth in non-lockdown states were solid.

Woolworths Supermarkets in-store sales fell 0.6% (or +1.4% ex-Tobacco), impacted by lockdowns as some customers shifted to online. Online sales growth remains robust at 53.1% with penetration now at 11.4% (vs 7.7% in the pcp).

Total COVID costs were 0.6% of sales (vs 0.2% in 2H21) due to higher PPE, labour and supply chain costs as a result of lockdowns, primarily in NSW and VIC. In addition, WOW will pay its staff a ‘Christmas Thank You’ bonus which is expected to cost A$35-40m in 2Q22.

New Zealand was strong while BIG W was heavily restricted

New Zealand Food LFL sales increased 9.0%, which was ahead of our 6.0% forecast. Growth was driven by lockdowns in Auckland as well as improving underlying demand and higher inflation. Online sales rose 17.4% with penetration now at 13.1% (vs 12.2% in the pcp).

BIG W LFL sales were down 16.8%, which was in line with our -17.0% forecast. The result was impacted by heavy restrictions in NSW, ACT and VIC - impacting 91 stores including eight stores in NSW and ACT that were completely closed - as well as cycling strong growth of 20.4% in the pcp.

WOW said states and territories not impacted by lockdowns experienced strong sales growth on a 2-year basis.

Australian Food sales slow in October

For October to date, WOW said sales have slowed in Australian Food as NSW lockdown restrictions eased. In contrast, BIG W sales trends have improved as Sydney stores reopen.

While the near-term outlook remains volatile as consumers adjust post-lockdown spending patterns, for 2Q22 we forecast LFL sales in Australian Food to increase 0.7%, NZ Food to rise 8.0% and BIG W to be up 0.4%.

Changes to earnings forecasts

We make minor changes to FY22-24 earnings forecasts with underlying EBIT lowered by 1% and underlying NPAT decreasing by between 1-2%.

Our PE-based target price falls to (login to view) and we maintain our Hold rating.

While WOW has been a beneficiary of COVID over the past 18 months with its broad store network and strong online presence, sales growth is likely to moderate going forward as economies reopen and the risk of lockdowns decreases due to higher vaccination rates. Trading on 31.1x FY22F PE and 2.4% yield we continue to see the stock as fully valued.

Risks

Upside risks to our valuation and target price include faster-than-expected Australian Food sales growth, lower costs and higher margins.

Downside risks include increased pricing intensity, more competitors entering the supermarket sector and a slowdown in sales momentum.

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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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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