Woolworth’s Group Ltd (ASX: WOW) business comprises supermarkets in Australia and New Zealand, Big W discount department stores and drinks and hospitality (known as the Endeavour Group). Endeavour Group was demerged from Woolworths with effect from 28 June 2021.
Woolworths has a market capitalisation of $56.5 billion. Woolworths has over $A56 billion of sales annually (excluding the Endeavour Group). This represents around 20% of retail sales in Australia. In terms of food and grocery sales, Woolworths market share is around 37% compared to Coles' market share of 29%.
What are the key features of Woolworths FY21 result?
Woolworths reported FY21 group sales for continuing operations (ie, excluding the Endeavour Group) of $55.7 billion), up 4.9% from FY20. Net profit after tax for FY21 is $1.5 billion, down 20.1% from FY209. Woolworths will pay a final dividend per share of 55 cents (fully franked), up 14.6%.
Regarding Woolworths specific operations, Australian Food normalised sales increased by 5.4% in FY21. First half 2021 (1H) sales grew by 5.4%, while in the second half 2021 (2H) sales increased by a modest 0.2% because in the second half 2020 sales were inflated due to COVID-19 buying activity. EBIT for Australian Food increase by 13.7% reflecting the growth in sales and margin improvement.
New Zealand Food sales growth in 1H was impacted by low market growth, particularly during the summer tourist season. In H2, sales declined 5.5% as the business cycled New Zealand’s restrictive COVID lockdown period. EBIT declined 4.6% in FY21 reflecting the lower sales. Customer scores were impacted by availability issues due to global supply shortages and shipping delays.
BIG W had another good year with improved customer scores and strong sales and EBIT growth. After sales growth of 20.1% in 1H, growth moderated in 2H but remained positive at 2.3%, despite the negative impact of lockdowns in the half. EBIT increased by over 300% in the year to $172 million.
Endeavour Drinks FY21 sales increased by 9.6% with EBIT increasing by 17.7% due to the continuation of the in-home consumption and a shift to premium products. Hotels delivered materially higher earnings than the prior year, with EBIT increasing 52% to $261 million. While some disruption to trading continued due to lockdowns, sales and EBIT growth in 2H benefitted from closed for most of the final four months of FY20.
Group eCommerce sales from continuing operations increased by 63.3% with eCommerce penetration on the same basis increasing 304 bps to 8.5% of sales. Average weekly traffic to Group digital assets (continuing operations) also increased materially with 17.2 million visits per week during F21. Group eCommerce sales increased by 58.1%.
Is Woolworths buying back shares?
Woolworths announced its intention to conduct an off-market buy-back of up to $2 billion of Woolworths’ shares. The buy-back will be conducted by way of an off-market tender process which will open on Friday 3 September 2021 and close on Wednesday 15 October 2021. The buy-back price will comprise a capital component of $4.31 per share, with the remainder of the buy-back price deemed to be a fully franked dividend. The high dividend component (approximately $31 per share) is particularly attractive to superannuation funds in the pension phase. The final pricing will be determined through a tender process.
What is the outlook for Woolworths?
Woolworths did not provide specific guidance for FY22 due to uncertainties relating to COVID-19 lockdowns in eastern Australia. Woolworth’s noted that for the first 8 weeks of FY22, COVID related costs have again increased due to COVID restrictions. This is a temporary cost increase.
FY21 was a transformative year for Woolworths Group due to the divestment of the Endeavour Group in June 2021. Also Woolworths increased our shareholding in Quantium from 47% to 75% at a cost of $223 million (illustrating the strategic importance of advanced analytics to the future of Woolworths), and completed its strategic investment of 65% in PFD Food Services. These are important steps in building Woolworth’s food and everyday needs ecosystem.
In the short-term, all of Woolworth’s business sales have benefited from the pandemic. However, it is important to note that once conditions normalise and a vaccine is developed, sales growth should return to normal. Woolworths is a defensive stock, with comparatively stable earnings and dividends. Over the longer term, Woolworths’s growth should be underpinned by population growth of around 1.5 per cent annually and running the existing business better than their competitors. In addition, Woolworths has captured a large section of the market, which should underpin long-term sustainable growth moving forward.
What is the market’s reaction?
The market reaction to Woolworths FY21 result is broadly neutral. Woolworth share price is currently trading at A$40.95. Woolworth is trading at a forward P/E ratio in the low-thirties and a dividend yield of around 2.5%.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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