Woolworths: Lockdown benefits diminishing
About the author:
- Author name:
- By Alex Lu
- Job title:
- Date posted:
- 28 October 2021, 8:30 AM
- Sectors Covered:
- Woolworths' (ASX:WOW) 1Q22 sales update was mixed and overall was slightly weaker than we expected.
- LFL sales: Australian Food +2.7% (vs MorgansF +4.5%), NZ Food +9.0% (vs MorgansF +6.0%) and BIG W -16.8% (vs MorgansF -17.0%).
- For October to date, WOW said sales have slowed in Australian Food as NSW lockdown restrictions eased while BIG W sales trends have improved as Sydney stores reopen.
- We decrease FY22F underlying EBIT by 1% to A$2,898m while underlying NPAT falls by 2% to A$1,597m.
- Our target price declines to (login to view) and we maintain our Hold rating.
Australian Food sales growth was below our expectations
LFL sales growth for the key Australian Food business of 2.7% was lower than our 4.5% forecast. Growth was driven by higher in-home consumption due to extended COVID lockdowns in NSW and VIC, additional online capacity and a successful Woolworths Bricks collectibles campaign. Encouragingly, management said sales growth in non-lockdown states were solid.
Woolworths Supermarkets in-store sales fell 0.6% (or +1.4% ex-Tobacco), impacted by lockdowns as some customers shifted to online. Online sales growth remains robust at 53.1% with penetration now at 11.4% (vs 7.7% in the pcp).
Total COVID costs were 0.6% of sales (vs 0.2% in 2H21) due to higher PPE, labour and supply chain costs as a result of lockdowns, primarily in NSW and VIC. In addition, WOW will pay its staff a ‘Christmas Thank You’ bonus which is expected to cost A$35-40m in 2Q22.
New Zealand was strong while BIG W was heavily restricted
New Zealand Food LFL sales increased 9.0%, which was ahead of our 6.0% forecast. Growth was driven by lockdowns in Auckland as well as improving underlying demand and higher inflation. Online sales rose 17.4% with penetration now at 13.1% (vs 12.2% in the pcp).
BIG W LFL sales were down 16.8%, which was in line with our -17.0% forecast. The result was impacted by heavy restrictions in NSW, ACT and VIC - impacting 91 stores including eight stores in NSW and ACT that were completely closed - as well as cycling strong growth of 20.4% in the pcp.
WOW said states and territories not impacted by lockdowns experienced strong sales growth on a 2-year basis.
Australian Food sales slow in October
For October to date, WOW said sales have slowed in Australian Food as NSW lockdown restrictions eased. In contrast, BIG W sales trends have improved as Sydney stores reopen.
While the near-term outlook remains volatile as consumers adjust post-lockdown spending patterns, for 2Q22 we forecast LFL sales in Australian Food to increase 0.7%, NZ Food to rise 8.0% and BIG W to be up 0.4%.
Changes to earnings forecasts
We make minor changes to FY22-24 earnings forecasts with underlying EBIT lowered by 1% and underlying NPAT decreasing by between 1-2%.
Our PE-based target price falls to (login to view) and we maintain our Hold rating.
While WOW has been a beneficiary of COVID over the past 18 months with its broad store network and strong online presence, sales growth is likely to moderate going forward as economies reopen and the risk of lockdowns decreases due to higher vaccination rates. Trading on 31.1x FY22F PE and 2.4% yield we continue to see the stock as fully valued.
Upside risks to our valuation and target price include faster-than-expected Australian Food sales growth, lower costs and higher margins.
Downside risks include increased pricing intensity, more competitors entering the supermarket sector and a slowdown in sales momentum.
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