WOW - Woolworths

[Snoopy]

I've been watching with some interest around the restructuring and the diversification of it's different businesses. Masters Home Improvement seems to have been the biggest winner for them. I don't like the volatility of the hotels or the gambling however, this doesn't seem to be as easy to predict a consistent revenue and profit from. One only has to look at ASX or NZX listed companies who has these industries as their core business and look and the yo-yo of up and down year by year performance from each.

WOW are clever retailers and I wouldn't bet against them. The only problem was that when they came to NZ, I think they met their match against our home grown food co-operative Foodstuffs. Streamlining all the WOW supermarkets under the 'Countdown' brand does seem to have worked for them at least initially. But you do wonder how many costs there are left to cut in New Zealand.

I would say the jury is still out on the Master Home Improvement roll out. They will certainly have to be sharp to compete with Bunnings.

As for the WOW hotel expansion, this was primarily done to expand their liquor retailing in states that only would allow liquor sales from hotels. The rest of the hotel business was an essential add on to the liquor retailing.

The gaming side of things at WOW I have only become aware of recently. I don't think WOW break down what proportion of their hotel earnings come from gaming. But the performance of gaming shares in Australia has been patchy mainly in recent times. There have been various disruptive events in Australia over the last few years (smoking bans, gaming/lottery licence expiries) that means this sector has not performed well. I was looking at using this 'gaming downturn' to expand my investment in this sector. However all of the prospects I looked at didn't stack up well compared to the Sky City shares that I already own. So if anything I will be looking to add to my investment in SKC

Getting out of Dick Smith (even though they sold for a $20 million price tag which was very very low) I thought was a good idea.

Yes I felt a certain nostalgic pang at my purchases from Dick Smith no longer filling my WOW dividend stocking, but it probably is for the best. Electronics retailing is a tough tough business.

Getting out of the property of their supermarkets I see the benefits, but then wonder with all the excess funds, where will they deploy it to earn high returns?

Opening up another 100 hardware megastores will consume that cash quite easily I would think. Whether that can be as profitable as the historic expansion of the supermarket business is another matter.

SNOOPY

[soulman]

Apparrently, Masters has been a loss making biz for them, but they did flagged that earlier.

In the gaming sector, CWN is doing well but rival EGP is pissed poor. Still got a small amount hoping for the Packer/Lim tilt on them. But since Crown is buiding their own in Sydney, EGP has weaken, but do look good value at current prices.

[soulman]

Last day to get some WOW shares to be entitled to the new demerged property group. More like a 28 cents capital return from WOW at SCP final offer price of $1.40.

[macduffy]

I've just added WOW to my watch list.

SP trending heavily down - but when it turns!

[winner69]

I've just added WOW to my watch list.

SP trending heavily down - but when it turns!

Interesting at the moment eh

Don't know whether it is because Coles are beating them hands down in groceries or punters worried about the huge losses Masters are makihn which don't look like they going away for years or the zillions associalted with the recall of the dodgy electrical wiring.

Prob a combo of all three but sentiment is all bad at the mo

But one day WOW will be a good buy

[h2so4]

I've just added WOW to my watch list.

SP trending heavily down - but when it turns!

Thanks macduffy I'll keep an eye on it.

[winner69]

Seems to be a basket case until major changes are made

http://www.smh.com.au/business/retai...24-11skc7.html

On November 10, Woolworths and its US partner, Lowe's, quietly tipped another $90 million into their struggling hardware business Masters Home Improvement.

According to the latest Australian Securities and Investments Commission filings, it brings total investment in the hardware joint venture to a whopping $2.91 billion – a whisker away from $3 billion. How much more it will need to pump in is subject to debate. The company won't say.

Taking risks: Woolworths chief Grant O'Brien.
Taking risks: Woolworths chief Grant O'Brien. Photo: Christopher Pearce

It is a big bucks investment – and a massive risk. An even bigger risk is the long-term impact on the rest of the Woolworths empire.



Besides the amount of money already sunk into the business, accumulated losses are likely to clock up to more than $1 billion before hardware breaks even. The company previously flagged a break-even date of 2016 but in August was forced to retract that. The market now expects it to break even by 2019, which would mean nine years of losses. There is speculation an impairment charge isn't far away.

If the quarterly figures released late last week by Lowe's are any guide, the losses from the hardware joint venture are getting worse, not better.

The Masters big box hardware chain and a few other hardware companies took a reputational hit in August after the Australian Competition and Consumer Commission announced a recall of dodgy electrical cable imported from China by a company that has now collapsed. An estimated 40,000 homes and businesses were wired with the faulty cable, which, according to the ACCC on October 31, "may become prematurely brittle and break if disturbed, exposing the internal conductors and potentially causing electrical shock or fires".

The cost of the cable recall, which involves ripping out the old cable and rewiring it, could be anywhere between $80 million and an extreme case of $600 million, according to Merrill Lynch. The variation depends on how many homes and businesses will need complete rewiring. In some cases a safety switch might suffice.

Against this unfolding saga, some investors are worried the jaws of death have bounced open across the group, at a time when competition has never been fiercer from Coles, Aldi and Costco, and when, by Woolworths's own admission, it is battling a price perception issue.

They cite Woolworths's first-quarter sales results, which were disappointing in all divisions. The fear is Woolworths will struggle to achieve 2015 earnings guidance of 4 per cent to 7 per cent net profit growth. Merrill Lynch analyst David Errington gave the sales results a three out of 10.

If Woolworths misses its 2015 earnings guidance, the bells will start tolling long and loud for Grant O'Brien and some of the longer-serving members of the board. In 2011 the supermarket giant missed its first earnings guidance in memory and not long afterwards its then CEO retired.

Crunch time

Put simply, it is crunch time for O'Brien and the board. Hardware, Big W, petrol and New Zealand are all under the pump and the jewel in the crown, the Australian supermarkets division, is starting to look shaky with signs consumers are starting to turn away from the stores on the basis Woolworths isn't offering the best prices.

Woolworths has long maintained it offers Australia's lowest-price, full-range supermarket. But if consumers don't think it does, the company has a problem. Perceptions drive consumer behaviour.

Australian food and liquor volumes fell by 2.5 per cent, the lowest volume growth in more than a decade, according to Morgan Stanley, "as food inflation [driven by fresh food/tobacco excise] ticked up, while like-for-like sales growth retraced." The concern is if volumes drop, there will be supply chain implications.

The problem for Woolworths is the hardware business appears to be infecting the performance of its overall operations. Woolworths owns 66.7 per cent of the joint venture with Lowe's, but Lowe's has an escape hatch: a put option, valued at more than $800 million, to walk away with 13 months' notice from next October.

Ironically, the hardware business was dubbed Project Oxygen because its aim was to suck the oxygen out of Wesfarmers by going after its best business, Bunnings, which sits in the empire along with Coles, Officeworks, Target and Kmart. The theory was if it hurt Bunnings, it would reduce Wesfarmers' ability to turn around Coles. Five years on, the strategy has horribly backfired and the perception is Wesfarmers is sucking the oxygen out of Woolworths' best business, food and liquor.

If it wasn't for the capital-hungry hardware business, Woolworths could have smashed Coles in 2010 instead of giving it a free kick. If it had sacrificed margins by launching a wide-scale price war, Coles would have been crushed.

Instead it chose to fatten up its margins in the supermarkets, partly to counteract the losses in hardware. In a recent note, Morgan Stanley made the alarming comment: "Over the past couple of weeks, we have met with a number of leaders in the Australian supermarket industry. A common thread in our discussions has been declining Woolworths in-store execution. Rising out of stocks, declining fresh food displays and tired stores were comments of note. We believe recent cost-out initiatives are beginning to affect store performance."

Comparative targets

Errington wrote a fascinating report in September comparing the remuneration policies of Coles and Woolworths. He found Wesfarmers's targets were more skewed to growth in return on equity, like-for-like store sales growth and a turnaround of Coles, while Woolworths was more skewed to total group sales, earnings targets and earnings per share growth. "On this basis, we consider Wesfarmers's remuneration targets to be more aligned to shareholder interests (based on our view that returns on investment are a more aligned objective to shareholder returns than absolute sales and earnings growth and EPS targets)."

It offers an insight into what might be driving some of the decisions, including rolling out new stores, sometimes in existing catchment areas, and rolling out Masters stores, which boosts total sales. It has also been busy selling some stores and leasing them back with long-term leases (presumably to reduce annual lease costs which boosts profitability).

Merrill Lynch notes the duration of Woolworths's lease commitments is longer than Wesfarmers's. "The longer the lease duration, the higher the financial risk of the lease in terms of close-out obligations [in the event of the lease being closed out]."

A Woolworths spokeswoman said the company was confident its strategy would "continue to deliver growth and solid shareholder returns, and that we will continue our consistent, reliable financial performance". In the past three years shareholder return had increased by 56.7 per cent.

Woolworths is trying to change the price perception to win market share. It launched the "Cheap, cheap" campaign, highlighting long-term price drops such as 85¢ bread, reintroduced red-spot weekly specials and is offering other specials.

If consumers see the campaign as little more than a jingle, it will do little to change their attitude. In the meantime the battle for market share between Coles, Woolworths, Aldi, Costco, Bunnings and Masters will ramp up.

If hardware gets in the way of its precious supermarket and liquor business, the board will need to make some tough decisions or investors will make their own.

Either way, Woolworths has got some serious soul-searching to do. As growth slows, competition intensifies and the price perception of Woolworths is thrown into the mix, its reliance on gross margin expansion and cost cuts to keep profits up will become increasingly difficult.

With the ACCC on high alert for any cases where suppliers are being screwed, it paints a picture of challenging times ahead.


Read more: http://www.smh.com.au/business/retai...#ixzz3Jy8ov0dx

[macduffy]

A strong day for WOW with the SP up over 2%. May be just the feelgood factor from the AGM so I'll look for some confirmation before getting too excited!

[macduffy]

Merrill Lynch predicts that WOW's profit will fall in 2016 and 2017 for the first time in 16 years.

http://www.theage.com.au/business/re...04-11zsrz.html

Personally, I'm still interested in a small flutter when the trend reverses!

[theace]

Any latest insights? ... SP seems to be at the lowest .... good buying op?