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- Aug 28 2015 at 3:58 PM
- Updated Aug 28 2015 at 4:18 PM
Woolworths charts new course out of limbo land
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[img=620x0]http://www.afr.com/content/dam/images/g/h/q/6/r/j/image.related.afrArticleLead.620x350.gja51w.png/1440742729799.jpg[/img]Ralph Waters has rejected suggestions he brought forward his retirement due to pressure from shareholders.Peter Braig
by MICHAEL SMITH
With its chairman Ralph Waters and chief executive Grant O'Brien leaving the company, supermarket giant Woolworths is in limbo and heading into unchartered territory.
No-one in the departure lounge seems prepared to accept accountability for a failed strategy to pursue profit over volume growth or the decision to funnel billions of dollars into a hardware business that is yet to turn a profit.
Instead, it will be up to former brewing boss and Woolworths' new chairman, Gordon Cairns, to find the management talent capable of restoring the company to its glory days at the top of the grocery chain.
That looks challenging with thoroughbred retailers Wesfarmers-owned Coles and German newcomer Aldi eager to exploit any weakness at Woolworths which has been operating in a management vacuum since O'Brien decided to quit in June.
Appointing a new chairman at this stage is the right thing to do though. A prickly Waters rejects suggestions that he brought forward his retirement due to pressure from shareholders for a board shake-up given the company's poor performance.
He says Woolworths always planned to announce the new chairman at this time, although that was not the impression given in June when he was quoted as saying "we do not think in the middle of this process to have further change is beneficial for the company".
Cairns' first and most important job will be to find a new chief executive to replace O'Brien who is still running the show, potentially until early 2016. Woolworths has a short-list of candidates and hopes to start interviewing in September. Waters insists the process is progressing well, but was not keen to elaborate when questioned on Friday.
Cairns' challenge will be finding a talented retailer to oversee the Woolworths' repair job, which includes fixing food and liquor sales and stemming the blood-letting at the Masters hardware business.
As Wesfarmers discovered when it appointed Ian McLeod to revitalise Coles, specialty retail talent is everything in the grocery game and Cairns will likely be looking offshore for the right person.
Cairns is also the chairman of Origin Energy and he sits on the board of Macquarie Group. His workload looks heavy but not unmanageable. Cairns does not have direct retail experience but he understands the supermarket game from the supplier side and was called in to chair David Jones last year when the department store group was in a spot of bother.
There will now be two former Lion Nathan chief executives chairing two major Australian grocers. New Metcash chairman Rob Murray replaced Cairns as chief executive of Lion Nathan in 2004 and both men held senior roles at Nestle.
There was some noise that former Woolworths chief and current Fairfax Media chairman Roger Corbett might have been a candidate, but he told me this week he had not been approached by the board and would not be interested if he had. "I've had my go," Corbett says.
Corbett, who ran Woolworths from 1999 to 2007, won't discuss Woolworths' current performance but he must be horrified given the company's drift away from the years of double-digit profit growth.
Woolworths, not unlike Coles Myer 15 years ago, became complacent and arrogant. It took its eye off the threat from revitalised competitors and missed an opportunity to nip the resurrection of Coles in the bud. It became distracted looking at offshore growth options, including targets in China, Chile and the United States such as North Carolina-based retailer Harris Teeter.
The focus on price increases and margin growth at the expense of volume growth has now been reversed. Woolworths says it invested $200 million on price to win back customers during the 2015 financial year, with most of that occurring in the fourth quarter.
But kick-starting the core supermarket business will be harder at a time when losses are widening at the Masters home improvement business which posted a $224.7 million loss in earnings before interest and tax (EBIT) for the year compared to a $169 million loss a year earlier. Sales rose $340 million to $1.867 billion.
This compares to a staggering $1 billion in sales growth alone for Wesfarmers' rival Bunnings business.
Bank of America Merrill Lynch analyst David Errington estimates the Masters stores need a 100 per cent uplift in sales and earnings to break-even, a figure Woolworths disputes. Woolworths is reducing the capital to be invested in the business by $600 million over the next three years but it is refusing to call it quits.
Errington's question to management on Friday around accountability for the Masters mess went unanswered. Waters earlier told journalists that the decision to move into hardware was before his time, although he personally has faith it will be thriving business years down the track.
Michael.smith@fairfaxmedia.com.au
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- Sep 5 2015 at 12:15 AM
- Updated Sep 5 2015 at 12:15 AM
Battered and bruised: too soon to buy Woolworths?
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[img=620x0]http://www.afr.com/content/dam/images/g/j/f/l/3/d/image.related.afrArticleLead.620x350.gjdm5t.png/1441354395338.jpg[/img]Is it too soon to buy Woolworths? Simon Letch
[Image: 1440036419987.png]
by Carrie LaFrenz
Grocery giant and household name Woolworths is battered and bruised, tumbling to a 52-week low on Friday hitting $25.07. The stock, one of the most shorted in the country, has lost roughly 30 per cent of its value in the last 12 months.
But behind the problems are still the makings of a formidable company: it operates more than 1000 supermarkets across Australia and New Zealand; Dan Murphy's and BWS are strong liquor businesses; and it has one of the best supply chains in the country, giving it a competitive advantage over rival Coles.
In the past Woolworths was considered a blue-chip company and a solid defensive investment. But the gloss has come off after a series of mis-steps.
Analysts say while there is no quick fix, the nation's largest retailer's problems can be mended. But for investors wondering how to time buying Woolworths shares, the wait for a turnaround could be long. While buying in just when the business begins to recover would be any investor's dream, what are the signs to show it's started happening?
Woolworths' long road back will will start by the appointment a new chief executive. The first of many tasks awaiting the new boss will be whether to sell the loss-making Masters home improvement chain and the discount retailer Big W. The pricing of grocery items in the core supermarkets business will also have to be fixed. So will its focus on its customers, with the company admitting this needs attention.
So while the tumble in the share price over the past year could be seen as a buying opportunity, analysts warn there could be further falls to come. Some analysts believe the share price is still too high, given earnings uncertainty at the nation's largest retailer.
Not only has Woolworths mismanaged the competitive landscape of the $85 billion supermarkets sector, but no one has taken responsibility for its disastrous foray into home improvement - which is losing more than $200 million a year, six years after its launch. By prioritising profitability over investing in price, it's given oxygen to rivals Coles, Germany's Aldi and US-based Costco. Meanwhile the discount chain Big W also continues to struggle, compounded by the surprise loss of its chief executive Alistair McGeorge in August after just a year in the job. Upmarket department store David Jones' move into premium food halls, which has been successful for Woolworths SA, is another threat.
Woolworths in August unveiled a 12.5 per cent fall in its full-year net profit to $2.15 billion, in line with the company's downgraded guidance. Its flat underlying net profit in 2015 would have been worse if the retailer had not cut costs by reducing staff bonuses.
The group's core food and liquor business is getting beaten by rivals, and the big question is when will it return to growth and at what cost?
The company has generated some of the highest earnings before interest and tax (EBIT) margins in the world – at 8 per cent at its peak in 2014. But leading supermarkets internationally once had the same margins as Woolworths but have given these up to compete with discounters.
Bruce Smith, principal and portfolio manager at Alphinity Investment Management, says Woolworths delivered reliable and increasing earnings year on year for a decade, but in the past five years it's been in a downward cycle.
"We look for a stock that is in an earnings upgrade cycle," he says. "This is really a multi-year evolution as to the way the earnings pan out. We don't see any reason to change our underweight position at the moment and are looking for better trends to make that change. If anything, the market may be too sanguine about the outlook over the next 12-24 months."
He explains: "For a supermarket, the sales number is critical. They have a high fixed-cost base. Having positive comparative sales is important. If they could do more than, say, 2 per cent comparative sales, that would be a much better health indicator."
Comparative sales is another term for same store sales, which measures the change from year to year of a retailer's sales, in a fixed base of stores, for a given month. Only stores open for at least a year are included.
Smith says Woolworths is investing in pulling grocery prices lower, but ironically taking prices down can make it even more difficult for them to reach that positive comparable number.
"Perception is everything," he adds. "People believing that it's a good place to shop is important. Investing $200 million in price sounds like a lot but when you are talking about $60 billion in sales……they may need to do much more of that."
Woolworths' strategy in reducing grocery prices has yet to boost same-store sales. These fell 0.9 per cent in the first eight weeks of fiscal 2016, matching the 0.9 per cent slide in the June quarter – the first negative outcome in 12 years. Analysts believe Woolworths may need to invest between $400 million and $550 million into branded and private label prices this year, crunching food and liquor margins and potentially triggering a full-blown price war with Coles and Aldi.
Wesfarmer-owned Coles and Woolworths still have the lion's share of the supermarket sector at 74 per cent, Aldi has about 10 per cent, leading IGA/Metcash at about 9 per cent, with the balance made up of independent grocers.
Coles and Woolworths have always played down the threat of Aldi. But while Coles has been winning market share, Woolworths and IGA/Metcash are losing market share to Aldi. To raise the stakes even further, Germany's Lidl is rumoured to be looking at opening in Australia in the next few years.
UBS analyst Ben Gilbert has a 'sell' on Woolworths. He says all the problems are fixable, but will take longer and cost more.
"We believe that Woolworths is a good business, but it has lost its way having been too short-term focused, taking margin at the expense of sales and customer focus," he adds.
"We believe it will take at least 24 months to return to a defendable like-for-like sales growth trajectory and along the way there is a very real risk of a major earnings and margin rebase. Coles and Aldi will not stand still while Woolworths turns the ship. The risk of a price war has increased in our view."
Morgan Stanley analyst Tom Kierath, who is underweight Woolworths, says Aldi and Costco prices are significantly cheaper compared to Woolworths (about 50 per cent cheaper on branded products and 27 per cent on own label).
He says Woolworths' share price could go as low as $17 if its big price investments are met with a similar price investment by competitors. Other reasons for his caution include increased regulation (which has reduced the opportunity to take profits from suppliers), and increasing competition from offshore rivals. Aldi plans to open 40 stores in South Australia and Western Australia, as well as 40 more stores on the eastern seaboard next year.
Newly appointed chairman Gordon Cairns, who took up his post on Tuesday, has a big task ahead in appointing a new chief in the wake of Grant O'Brien's departure.
It is believed there is no shortlist of candidates and interviews are not underway. Apparently Cairns – a former chief executive of Lion Nathan – has no firm thoughts as to whether the person appointed to the role should be internal or external, a UK retailer, a grocer or from outside the sector completely. This suggests the CEO nomination is months away. Once the new boss joins, he or she will need to take time to understand Woolworths – leaving little accountability for 2016 profitability and increasing earnings risk.
Citi analyst Craig Woolford expects Woolworths shares to trade lower as the reality of its earnings downside hits home, with the next catalyst likely to be the new CEO appointment.
"If the right candidate is appointed, the shares could rally initially. However, we expect a new CEO is likely to rebase earnings to provide scope for sustainable earnings growth. Our long-term food & liquor EBIT margins are 6.2 per cent, down 180 basis points from a peak of 8 per cent in fiscal 2014."
Hugh Dive, portfolio manager at Aurora Funds Management, agrees the key now for investors is who the new CEO will be and what will be the new strategy.
"We have seen this time and time again – a new CEO comes in and has the leeway to re-set things, to re-base earrings. We saw this with Orica when Alberto Calderon came in – he was incentivised to make hard decisions and the stock fell 18 per cent. But I think the market will not be surprised and indeed will welcome hard decisions a new WOW CEO will make."
There are concerns about what Woolworths will do with both Masters (a joint venture with US-based Lowe's) and Big W (given it sold electronics retailer Dick Smith for a song, allowing private equity to take the spoils). Another potential liability is Lowe's put option over the Masters business, which can be exercised any time after October this year and could cost Woolworths between $700 million and $800 million.
Dive says closing Masters – or selling it to private equity or spinning off property – could be a good outcome for the grocer. He adds while Woolworths' management has made poor choices and managed competition badly in the past, it is not completely shattered.
"This is a company which has $60 billion of revenue ….this is not a completely broken business. It's the country's largest retailer. A new CEO will not cut dividends to zero. But the market would be keen to see an external candidate for CEO."
Dive warns there are "no quick fixes" and while he would own Woolworths stock, investors' confidence needs to be tempered as it's not business as usual.
Woolworths is trading on a PE multiple of 13.4 times one year forward earnings, with a yield of about 5.5 per cent. This is a multi-year low for the retailer, says Dive.
Short sellers are betting against the company. A year ago Woolworths had less than 1 per cent of its shares shorted. Now that figure is 8 per cent, making it one of the most shorted stocks in the market.
A fund manager, who wishes to remain unnamed, says he would not read too much into the shorting of Woolworths and would never base his investment view on the shorting of a stock.
"The only people who should worry about shorts are those who have a short position since they could get squeezed. The main lesson in retail is never buy when there is no CEO. You don't know what you are buying into," he says.
"The Woolworths model is not broken but you don't fix shocking management in six to 12 months. They need to change perception. They need to work out what they stand for. They were the 'Fresh Food People', but they lost their values. The Australian public doesn't trust them any more."
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Five reasons investors are angry with Woolworths
DateNovember 26, 2015 - 8:56AM
[Image: 1439253711264.jpg]
Catie Low
Reporter
Shareholders have plenty to complain about at Woolworths' annual general meeting this year. Here are five things on their minds.
Marketing mishaps
It was supposed to be the fresh food campaign that leveraged Australia's deep affection for the ANZAC legend and yet all it did was offend.
Undeterred by the backlash against Fresh in our Memories, the Woolworths marketing team dreamed up another campaign just six months later that alienated another segment of its customer base.
This time The Fresh Food People took aim at fresh food lovers, with an advertisement suggesting people who grew their own food and enjoyed fresh produce were dirt-eating freaks.
Monstrous Masters
It was supposed to take on hardware giant Bunnings but instead Masters has been a study on how to sink $3.3 billion into a business and still not make money.
At last count, Masters stores are estimated to be losing about $78,000 a week and the joint owners Woolworths and US hardware behemoth Lowe's burnt $67.5 million in the first quarter of 2015-16 alone.
Despite growing anger over this capital destruction, Woolworths and Lowe's continue to feed the hungry Masters monster, investing $105 million in the venture in mid October.
Supermarket sell down
Just in case shoppers hadn't noticed the unhappy staff, run-down stores and those annoying Cheap, Cheap birds, Woolworths started putting up its supermarket prices from mid-2014 as it scrambled to safeguard margins at the cost of sales.
It was an own goal for Woolworths and revealed the damaging disconnect between the supermarket chain's management and its most valuable asset, its customers.
Shoppers voted with their trolleys, taking their shopping list to arch-rival Coles as well as Aldi and Costco, leaving the one-time market darling to count the cost to its battered brand.
The long and lucrative goodbye
For the handful of Woolworths shareholders not concerned about the financial bleed from the Masters business or its disconnect with customers, there's always outgoing chief Grant O'Brien's generous $10 million benefits payout to get angered up over.
Mr O'Brien is only able to collect these benefits because the Woolworths board allowed him to stay on during the search for a new chief executive and accrue annual leave and long service to ensure he qualifies for the lucrative defined benefits scheme.
While shareholders fret over the share price collapse, Mr O'Brien can look forward to a total superannuation payout of between $9 million and $10 million.
Loyalty losers
It was the jewel of Woolworths' rewards program and a powerful tool in the battle for customer loyalty but that didn't stop the retailer from cutting ties with Qantas' Frequent Flier program in October.
In its place Woolworths unveiled what it called a simplified loyalty scheme, where shoppers can earn discounts on their future purchases, but only if they accrue sufficient points from certain orange-ticketed products.
Not to be confused with the yellow or red ticketed items, or a straightforward rewards scheme.
The decision to walk away from Qantas unleashed a furious response on social media and retail analysts suggest the confusing new scheme will cost as much as four times the Frequent Flyer program.
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