Woolworths: A crazy half

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
25 February 2022, 6:30 AM
Sectors Covered:
Industrials

  • Woolworths' (ASX:WOW) 1H22 result was in line with expectations at the underlying EBIT line following the company’s trading update in mid-December. However, a lower effective tax rate drove a beat at the underlying NPAT level.
  • 1H22 LFL sales: Australian Food +2.3%, New Zealand Food +7.5%, Big W -8.3%.
  • Divisional EBIT: Australian Food -8% (+1% vs MorgansF), NZ Food +6% (-6% vs MorgansF) and BIG W -81% (-2% vs MorgansF).
  • For the first seven weeks of 2H22, total sales at Australian Food (Woolworths Retail) were up ~5%, NZ Food grew ~5%, while BIG W was down ~4%. WOW said inflation has continued to trend upwards.
  • We decrease FY22F underlying EBIT by 1% while underlying NPAT rises by 1% due to lower tax expense. Our PE-based target price lifts to (login to view).
  • While we believe the extraordinary operating conditions in 1H22 are unlikely to be repeated with some signs of stabilisation, trading on 29.8x FY22F PE and 2.5% yield we continue to see WOW as fully valued. Hold retained.

1H22 result was largely as expected following the December trading update

1H22 underlying EBIT was down 11% to $1,382m (in line with MorgansF and Visible Alpha consensus) and underlying NPAT decreased 6% to $795m (+6% vs MorgansF and +7% vs Visible Alpha consensus).

Group EBIT margin fell 100bp to 4.3% with COVID having a significant impact on costs both directly and indirectly due to the disruptions in the supply chain and the inefficiencies caused in store, distribution centres and transportation.

Divisional summary

Australian Food EBIT fell 8% to $1,217m, which was 1% above our forecast and at the top end of guidance ($1,190-1,220m).

LFL sales rose 2.3% despite cycling 9.3% growth in the pcp as the business benefitted from higher at-home consumption due to extended lockdowns in NSW and VIC, the rollout of additional online capacity, and successful Bricks, Winter and Christmas campaigns. EBIT margin decreased 60bp to 5.1% due mainly to higher COVID costs.

NZ Food EBIT rose 6% to $191m (-6% vs MorgansF) with LFL sales up 7.5% reflecting prolonged COVID restrictions. While sales growth was slightly above our forecast, the miss at the EBIT line was due to higher costs associated with COVID, wages and D&A from store and digital investments. EBIT margin fell 20bp to 5.0%.

BIG W EBIT declined 81% to $25m, which was 2% below our forecast and at the midpoint of guidance ($20-30m). The business was heavily impacted by extended lockdowns and trading restrictions with EBIT margin falling to 1.1% vs 5.1% in the pcp.

Current trading and outlook

WOW said inflation has continued to trend upwards with shelf prices so far in 2H22 rising 2-3% reflecting cost pressures being experienced by suppliers.

Prices in 1H22 were moderately deflationary at both WOW (-0.7% ex-tobacco) and Coles (COL) (-0.2%) predominantly driven by deflation in fruit from favourable growing conditions. As fruit prices normalise, we expect this to put upward pressure on overall prices in the coming months. 

For the first seven weeks of 2H22, total sales at Australian Food (Woolworths Retail) were up ~5%, NZ Food grew ~5%, while BIG W was down ~4%. Management expects trading at BIG W to remain challenging but the business to still report a profit in 2H22.

In addition, assuming the operating environment continues to normalise, management expects an improved group financial performance in 2H22. We estimate group EBIT to be up 6% in 2H22.

Changes to earnings forecasts and investment view

We decrease FY22F underlying EBIT by 1% while underlying NPAT increases by 1% due to lower tax expense.

Our PE-based target price rises to (login to view) and we maintain our Hold rating.

Trading on 29.8x FY22F PE and 2.5% yield we continue to see WOW as fully valued and continue to prefer Coles (ASX:COL) (Add rating) in the Staples sector.

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