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).
Woolworths has a market capitalisation of $46.5 billion. Woolworths has over $A60 billion of sales annually. 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 the March quarter 2020 sales result?
Woolworths’ total March quarter 2020 sales revenue increased by 10.7% to $16.5 billion ($14.9 billion in the December quarter 2019).
For the Australian Food business (ie, supermarkets), total sales for the March quarter increased 11.3% to $11.2 billion with comparable sales increasing 10.3%. Total sales growth was approximately 3% for the first seven weeks of the quarter but increased materially from the week ending Sunday 1 March due to COVID-19 issues and peaked in the week ending 22 March with growth of over 40%.
WooliesX (online shopping) delivered solid sales in the March quarter. However, growth was below recent levels, due to material capacity constraints in March. Online sales in January and February increased by over 40% but declined in March with sales increasing by 26.5% in the March quarter. While online penetration of 4.1% increased relative to March quarter 2019, it was below December quarter 2019 penetration of 4.4%.
For New Zealand Food business, total sales increased by 13.7% to $1.9 billion. Comparable sales increased by 13.4% driven by sales growth of over 50% in the week prior to full lockdown, with certain days more than doubling, reflecting the peak period of customer pantry-loading. On 26 March, New Zealand moved into Alert Level Four lockdown with major supermarkets, pharmacies and dairies (convenience) the only retail operations allowed to remain open. Under the tighter restrictions, most other retailers including butchers, takeaway shops, fast food outlets and delivery options were suspended. On 27 April, restrictions were downgraded to Level Three which allows more businesses to open but physical contact with customers is still restricted.
In respect of Big W, total sales increased by 9.5% to $866 million with comparable sales growth of 9.9%. Easter-adjusted comparable sales grew by 8.8% with BIG W the only Group business with a material Easter-timing impact. March quarter 2020 was BIG W’s eighth consecutive quarter of positive comparable sales growth with sales growing every month in the quarter but accelerating from late February as a result of COVID-19.
Endeavour Drinks total sales increased by 9.5% in the March quarter 2020 to $2.3 billion with comparable sales increasing by 8.9%. January and February sales were subdued and impacted by low market growth due to weather and bushfires. However, sales grew materially in March with a pronounced surge in demand commencing on 22 March in Victoria and New South Wales. Sales growth rates have now begun to moderate.
What is the outlook for Woolworths?
In the short term, issues related to COVID-19 will continue to impact on Woolworths businesses. Similar to Coles, the extend of this impact will depend on the extent or timing of the existing or any future Government measures, as well as when measures may also start to ease. Higher unemployment for an extended period of time could also have a negative impact. There could also be longer term behavioural changes in consumer spending patterns once COVID-19 issues subside.
Consequently, as noted by Woolworths’ management, the rate of sales growth for the remainder of the financial year is very difficult to predict.
Woolworths’ management noted that sales growth across the Group has continued in April 2020 although growth rates have moderated relative to March. Australian Food sales growth in the first three weeks of April is in the mid-single digits with Drinks sales growth broadly back to pre-COVID-19 levels.
While sales growth was strong in the March quarter, this was partially offset by higher incremental operating costs largely due to increases in team wages in Store, eCommerce and Supply Chain to meet higher demand and to support safety and social distancing. Incremental costs have also been incurred for cleaning, security and safety equipment.
Looking forward to the June quarter 2020, a number of costs are expected to continue. This includes costs associated with the temporary employment of approximately 22,000 new team members that will continue to support safety and social distancing, additional warehouse capacity, scaling up online (particularly the expansion of Home Delivery) as well as ongoing security and, cleaning costs. In the June quarter 2020, these incremental costs are expected to be in the range of $220 - $275 million for the Group (excluding Hotels).
Woolworths is a defensive stock, with comparatively stable earnings and dividends. Over the longer term, Woolworths growth should be underpinned by further 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 reaction to Woolworths March quarter sales result?
The market reaction to Woolworths’ sales report is slightly negative, with its share price is down 1.2%. In contrast, the broadly market is up by around 1%. Woolworths is currently trading at $35.60. Woolworths trades on a forward PE in the mid-twenties and a dividend yield around 3%.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.