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In a surprising turn of events, Woolworths (ASX: WOW), Australia's retail giant, anticipates a non-cash impairment of NZ $1.6 billion in its 2024 interim results. The challenges faced by its New Zealand business and a weakened market outlook have led to shares plummeting. However, amidst these setbacks, the supermarket chain remains optimistic, citing robust performance in its Australian stores and food distribution business. This article delves into the intricacies of Woolworths' forecast and explores the factors influencing its financial landscape.
Woolworths' Financial Outlook
Despite the hurdles faced by its New Zealand ventures, Woolworths projects first-half unaudited EBIT between AU$1.68 billion and AU$1.70 billion, a slight increase from the previous year's AU$1.64 billion. The surge is attributed to the commendable financial performance of its Australian Food business and food distributor PFD Food Services.
New Zealand Struggles and Market Volatility
Woolworths acknowledges the ongoing challenges in its New Zealand business, exacerbated by recent tough macro-economic conditions. Retail analyst Phillip Kimber of E&P Capital highlights the volatility of the NZ Supermarket segment. Although Woolworths expected a resilient performance from the Australian Food business, the persisting volatility in New Zealand remains a concern.
Implications of the Impairment
The NZ $1.6 billion non-cash impairment will lead to a write-down against Woolworths' current goodwill balance of NZ$2.3 billion. The company attributes this to the effects of a weaker medium-term market outlook and ongoing organizational transformation initiatives yet to reach their full potential.
Woolworths' Endeavour Group Stake and Loss Projection
Woolworths anticipates a AU$209 million loss following a review of its 9.1% stake in local alcohol retailer Endeavour Group. The decision stems from the belief that Woolworths no longer holds "significant influence" over the ASX-listed peer.
Acquisition History and Financial Impact
The supermarket giant had acquired the wholesaling and supermarket assets of Foodland's New Zealand business in 2005 in a deal valued at AU$3.38 billion. The decision to record a loss on the Endeavour Group stake further underlines Woolworths' strategic approach to its investments.
The Future: Earnings and Market Position
Woolworths expects a first-half EBIT of NZ$71 million for its New Zealand segment, reflecting a 42% decline from the previous year. The dip underscores the current challenges faced by the company in the NZ market.
Assessing Market Position and Transformation Initiatives
The supermarket chain remains focused on its organizational transformation initiatives, aimed at revitalizing the New Zealand business. Despite the expected loss and challenges, Woolworths is determined to leverage its strong market position in Australia to counterbalance the impacts of the NZ market downturn.
Woolworths' Response and Analyst Insights
On 29 January 2024, Woolworths' shares closed 0.02% down at AU$36.19 apiece, marking the most significant loss in a fortnight. Retail analyst Phillip Kimber from E&P Capital emphasizes the disappointment surrounding the NZ Supermarket business's continued volatility. However, he acknowledges the stronger-than-expected performance from the key Australian Food business.
Optimism Amidst Challenges
While challenges persist, Woolworths remains optimistic about its overall performance. The company's ability to offset the NZ market challenges with robust results from its Australian operations reflects its resilience in navigating complex market conditions.
