Woolworths: COVID-19 anniversary nears

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Alex Lu
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By Alex Lu
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Date posted:
24 February 2021, 3:00 PM
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  • Woolworth's (ASX:WOW) 1H21 result overall was well ahead of our expectations.
  • Key positives: Big W was the key standout with the turnaround gaining momentum; Hotels earnings were not as weak as we expected; COVID-19 costs as a percentage of sales was down to 0.8% in 1H21 vs 2.0% in 2H20.
  • Key negative: NZ Food was weaker than we anticipated and was the only division (other than Hotels) that did not deliver EBIT margin expansion.
  • We increase FY21F underlying EBIT by 7% to A$3,657m. Our target price rises (login to view) and we maintain our Hold rating.

1H21 result was comfortably above our expectations

1H21 underlying EBIT increased 11% to A$2,092m (+9% vs Morgans) while underlying NPAT rose 16% to A$1,135m (+14% vs Morgans).

All divisions except for Hotels delivered earnings growth with EBIT for the core Australian Food business up 13% (+4% vs Morgans).

Australian Food LFL sales rose 9.3% (vs Coles Supermarkets +7.2%) driven by ongoing COVID-19-related demand as well as a successful Disney+ Ooshies campaign.

Sales growth however moderated through the half (1Q21 LFL sales +11.5%; 2Q21 +7.1%) as COVID-19 restrictions eased. The balance sheet remains strong with net debt (ex-leases) of only A$447m while 1H21 DPS of 53cps was above our 46.5cps forecast.

Big W turnaround gaining momentum

Big W was the key highlight of the result with EBIT up 166% to A$133m (+111% vs Morgans), continuing an impressive turnaround of the business that was loss-making between FY16-19.

LFL sales grew 21.5% with strong growth across all major categories as Big W’s offer continues to resonate with families. Endeavour Drinks’ performance was solid with EBIT up 24% (+12% vs Morgans) as COVID-19 continues to drive elevated inhome consumption.

Hotels earnings were lower (EBIT -46%), albeit better than we expected (+28% vs Morgans), reflecting government-imposed trading restrictions.

2H21 off to a good start

Management advised that for the first seven weeks of 2H21, sales in Australian Food were ~8% higher, NZ Food was up 1%, Big W growth was 18% and Endeavour Drinks was up 14%.

Hotels sales were down 12% but with a lower rate of decline than 2Q21. Looking ahead to the rest of FY21, management expects sales to decline over the Mar-Jun period in all businesses (except Hotels) due to the cycling of the COVID-19-surge last year.

Overall, we forecast FY21 underlying EBIT to be up 14% to A$3,657m. WOW also intends to complete the separation of Endeavour Group by June 2021, via either a demerger or value-accretive alternative, with further information provided over the next few months.

Maintain Hold rating

Following the better-than-expected 1H21 result we increase FY21F underlying EBIT by 7% to A$3,657m. Our PE-based target price rises (login to view) and we maintain our Hold rating.

While WOW’s overall performance remains strong, trading on 24.3x FY22F PE and 3.0% yield we to see the stock as fully valued. We continue to prefer Coles (COL) (Add rating) in the Staples 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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