Woolworths: Customer behaviour normalising

About the author:

Author name:

By Alex Lu

Job title:

Analyst

Date posted:

26 August 2022, 7:30 AM

Sectors Covered:

Industrials

• Woolworths' (ASX:WOW) FY22 result was slightly above our forecast but broadly in line with Bloomberg consensus expectations.
• Divisional EBIT: Australian Food +0% (+1% vs MorgansF), Australian B2B +250% (in line with MorgansF), New Zealand Food -12% (-6% vs MorgansF), and BIG W -68% (-15% vs MorgansF).
• Total sales in the first eight weeks of FY23: Australian Food -0.5%, NZ Food -1%, BIG W up just under 30%. WOW said customer behaviour is normalising.
• We decrease FY23F underlying EBIT by 1% and underlying NPAT also falls by 1%.
• Our target price decreases to (login to view), reflecting a more uncertain outlook (cycling lockdowns in 1H22, supply chain challenges, staff absenteeism, cost of living pressures for customers etc). Hold rating maintained.

FY22 result was slightly above our expectations

FY22 underlying EBIT was down 3% to $2,690m (+2% vs MorgansF and in line with Bloomberg consensus) and underlying NPAT increased 1% to $1,514m (+5% vs MorgansF and +2% vs Bloomberg consensus).

Divisional summary

While Australian Food FY22 EBIT was flat at $2,420m (+1% vs MorgansF), 2H22 performance (EBIT +10%) was much better than 1H22 performance (-8%), which was impacted by higher costs and inefficiencies due to supply chain disruptions.

FY22 LFL sales rose 3.5% with 1H22 sales benefitting from higher at-home consumption on the back of lockdowns in NSW and VIC, while 2H22 sales partly reflected higher price inflation.

Inflation continues to accelerate due to industry wide input cost pressures with shelf prices (ex-tobacco) rising 3.6% in 4Q22 vs deflation of 0.9% in 1Q22. Key categories of inflation included drinks and household care as well as meat and vegetables. Fruit continued to be in deflation.

NZ Food FY22 EBIT fell 12% to $296m (-6% vs MorgansF) with 2H22 EBIT down 32%. While LFL sales rose 2.3% in 2H22, earnings were impacted by higher COVID costs, staff absenteeism and supply chain disruptions.

Other cost increases included higher D&A from investment in the store network and increased spend on supply chain and digital capabilities. FY22 EBIT margin fell 90bp to 4.2%.

BIG W FY22 EBIT declined 68% to $55m (-15% vs MorgansF), although the magnitude of the decline was lower in 2H22 (-23%) vs 1H22 (-81%) as stores reopened and mobility increased following extended lockdowns.

Current trading and outlook

WOW expects the trading environment to remain volatile and challenging due to endemic COVID disruptions, ongoing supply chain challenges, higher costs across the business and cost-of-living pressures for customers. 1H22 sales in Australian Food will also cycle lockdowns in the pcp.

For the first eight weeks of FY23, total sales in Australian Food (-0.5%) and NZ Food (-1%) were lower, while BIG W was up just under 30%.

Management said a major driver of the sales in early FY23 was the normalisation in customer behaviour with a return to shopping malls. Customers are also becoming more value conscious with shifts in some categories (eg. from beef to pork or chicken or from fresh to frozen products).

In addition, WOW expects NZ Food EBIT in 1H23 to be materially below the pcp due to supply chain disruptions, team absenteeism, item declines, materially higher costs and a very competitive trading environment. For 1H23, we forecast NZ Food EBIT to be down 39% to NZ$123m.

Changes to earnings forecasts and investment view

We decrease FY23F underlying EBIT by 1% and underlying NPAT also falls by 1% mainly due to downgrades to NZ Food earnings.

Our PE-based target price decreases to (login to view) on a lower valuation multiple of 27x (vs 29x previously) reflecting a more uncertain outlook (cycling lockdowns in 1H22, supply chain challenges, staff absenteeism, cost of living pressures for customers etc).

While we retain our Hold rating, we continue to see WOW as a good, defensive business that should perform relatively well if macroeconomic conditions worsen.

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