Woolworths: Adjusting to life without Endeavour

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Alex Lu
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By Alex Lu
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Date posted:
27 August 2021, 10:00 AM
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  • WOW’s FY21 result overall was below our expectations. While not straightforward due to the recent Endeavour Group (EDV) demerger, we believe the result was broadly in line with Bloomberg consensus estimates.
  • Key positives: WOW has announced a A$2bn off-market buyback; Australian Food performance was good with positive sales growth in FY22.
  • Key negatives: BIG W performance was weaker than expected with lockdowns impacting sales in early FY22; Capex is expected to remain elevated (~A$2bn pa) over the next few years (despite the separation of EDV) due to construction commencing at WOW’s Moorebank DCs, the Auburn CFC and further investment in Direct to Boot capacity.
  • WOW advised that for the first 8 weeks of FY22, Australian Food total sales were up 4.5% while BIG W was down 15.1%. NZ Food was seeing some benefits from recent lockdowns. We adjust FY22F/FY23F/FY24F group EBIT by 0%/+3%/+4%.
  • Our target price rises to (login to view) and we maintain our Hold rating.

FY21 result overall was below our expectations

FY21 EBIT increased 11% to A$2,764m (-3% vs MorgansF) and underlying NPAT grew 20% to A$1,504m (-4% vs MorgansF). The result was driven by earnings growth in both Australian Food (EBIT +9%) and BIG W (+341%) while NZ Food EBIT fell 6% after cycling strong growth in FY20.

One of the highlights was the announcement of a A$2bn off-market buyback. While this was previously flagged following completion of the EDV demerger, the buyback amount was at the top end of the A$1.6-2.0bn range that WOW said could be returned to shareholders.

Australian Food continues to perform well

Australian Food EBIT rose 9% to A$2,432m (+2% vs MorgansF) with sales up 5% on the back of elevated demand due to COVID and successful promotional campaigns (Disney+ and glass containers).

Online sales were very strong (+75%) and now represents 7.9% of sales vs 4.8% in FY20. EBIT margin rose 20bp to 5.5% on the back of improved stock loss and favourable product mix, partially offset by higher eCommerce, digital and supply chain costs.

NZ Food EBIT fell 6% to A$336m (-3% vs MorgansF) with the decline accelerating in 2H21 (EBIT -13%) due to the cycling of strong COVID-related growth in the pcp. Management noted however that the 2-year average growth momentum has continued to improve in FY22 with some benefit to sales from recent lockdowns.

BIG W continued its transformation with EBIT jumping 341% to A$172m. While the result was 15% below our forecast, it was nonetheless a strong turnaround given the business was loss making between FY16-19.

COVID impacts continue

WOW advised that COVID has led to strong sales growth in early FY22 in Australian Food and more recently NZ Food, but negatively impacted BIG W.

For the first 8 weeks of FY22, Australian Food total sales were up 4.5% while BIG W was down 15.1%. WOW expects 1H22 BIG W EBIT to be materially below the pcp.

Changes to earnings forecasts and investment view

FY22F group EBIT remains broadly unchanged at A$2,935m with upgrades to Australian Food (+6%) and NZ Food (+1%) offset by downgrades to BIG W (-53%) and higher corporate costs. FY23F and FY24F group EBIT rises by 3% and 4%, respectively, mainly driven by stronger growth expectations for Australian Food.

Our PE-based target price rises to (login to view) and we maintain our Hold rating. Despite the impact of COVID on BIG W, WOW’s food businesses should continue to benefit from greater in-home consumption, which we believe will provide support for the share price in the near term.

However, trading on 32x FY22F PE and 2.3% yield we see WOW’s valuation as full and continue to prefer Coles Group (COL) (Add rating) in the Supermarkets sector.

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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.

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