Why Should Investors Still Look At Woolworths?

Woolworths Group Limited (ASX:WOW) operates in Australia and New Zealand with 3,774 stores and ~202,000 employees in 2018, with the principal activities across –

(a) Australian Food - operating 1,008 WOW Supermarkets

(b) Endeavour Drinks - under Dan Murphy’s and BWS brands and Summergate stores

(c) New Zealand Food - 181 Countdown Supermarkets and wholesale operation, which supplies a further 69 stores

(d) BIG W: 183 BIG W stores

(e) Hotels: 323 hotels

(d) Petrol: 534 canopies.

WOW recently released an update for the sales numbers in Q3 FY19, witnessing an improvement in the revenue momentum across the segments with 4.2% Australian Food comparable revenue growth (Easter-adjusted). However, the management expects the market for Australian Food to remain challenging on the back of higher input cost. Despite the weak surrounding, the management remains confident for FY19 and FY20, and expects to deliver revenue growth and a return on investments.

Easter-adjusted revenue for Endeavour Drinks saw a strong growth of 6.4%, driven by strong comparable growth from BWS and Dan Murphy’s. Beer and Spirits category grew ~2% and 4%, respectively. ‘Container Deposit Scheme’ introduction in Queensland supported the revenue growth in Beer in November 2018. The unsettled weather was not in favour of the business and impacted revenues across all the business segments negatively, the most noticeable being Endeavour Drinks in H1 FY19. However, improved weather condition later across the key trading states resulted in the excellent sales numbers for 3Q FY19 along with the timing of New Year’s Eve, which also supported revenue in the same period.

Going forward, the management expects FY19 EBIT for Endeavour Drinks to be below FY18 numbers. Online sales recorded a strong growth of 10.5%. ‘On Demand’ revenue for Dan Murphy’s was robust with the rollout of 79 stores in 3Q FY19. WOW opened seven BWS stores and one store was closed with the total fleet size of 1,338 in 3Q FY19. Contrary to that, Dan Murphy’s did not see any new store opening in the quarter with a total number of stores coming in at 227 at the end of 3Q FY19.

BIG W’s Easter-adjusted sales saw a growth of 5.6%, largely due to Everyday, Leisure and Home. The management expects this segment to remain challenging with strong revenue growth unlikely to be visible in the profit. The management expects this segment to experience a loss before interest and tax of $80 million to $100 million in FY19.

Easter-adjusted sales growth for New Zealand Food came in at 2.9% with robust online growth. Revenue growth in Hotel was also improved by 2.7% in 3Q FY19.

The company completed a sale of Woolworths Petrol to EG Group successfully on 1st April 2019, with the proceeds of $1.7 billion being returned to shareholders. Revenue for Petrol declined by 8.2% (Easter-adjusted) with Easter-adjusted comparable volumes decreasing by 7.0%. Average fuel prices in the quarter came in at 128.3 cpl as compared to 134.9 cpl in 3Q FY18.

Gross margin of 31.2% for H1 FY19 declined 58 bps, mainly on account of the markdowns in seasonal apparel with a slow start to the season, negative category mix and higher stockloss.

Currently, the stock is trading close to its 52-week high with a current market price at $32.955 as on 10 May 2019, AEST 03:46 PM.

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