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 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 has Woolworths announced today?
Woolworth’s announced that the company plans on developing an automated regional distribution centre and a semi-automated national distribution centre at Moorebank Logistic Park Sydney. Construction of this distribution centre is expected to be complete at the end of calendar year 2023 with financial benefits to be realised in FY25.
This new distribution centre will replace the current ambient grocery operations at Woolworths’ Sydney Regional Distribution Centre (Minchinbury), Sydney National Distribution Centre (Yennora) and Melbourne National Distribution Centre (Mulgrave).
Woolworth’s has noted that the company is expected to invest $700 - $780 million in technology and fit out of the two distribution centres over the next four years and has signed an initial lease term of 20 years. This new project will be funded by Woolworth’s group existing capital and is not expected to increase the Group’s existing capital expenditure spend over the period of construction and installation.
This decision will result in a one-off pre-tax cost of $174 million, which will be recorded as a significant item in the upcoming FY20 profit results. There are 2 other significant items mentioned in the report for FY20. These include $230 million Endeavour Group transformation costs and a $185 million salaried store team member remediation. The total significant items for FY20 (that will be shown in the FY20 profit result) is $591 million.
Woolworth’s also announced a trading update regarding the company’s sales to date. Australian Food for Q4 to date is up 8.6%, New Zealand Food for Q4 to date is up 15.1%, Big W for Q4 to date is up 27.8% and Endeavour Drinks for Q4 to date is up 21.4%.
Woolworth’s mentioned that incremental costs related to COVID-19 is in the range of $220 - $275 million. These costs are expected to be towards the higher end of the range during Q4.
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 extent 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. High unemployment for an extended period could also have a negative impact. According to the most recent unemployment numbers, unemployment is at around 7.1% but this excludes people on Job Keeper and discouraged workers (people dropping of the labour market). There could also be longer term behavioural changes in consumer spending patterns once COVID-19 issues subside.
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?
The market reaction to Woolworth announcement is neutral. Woolworth share price is down 0.74% and is currently trading at A$36.39. The reason why this reaction is neutral is because the Australian market is down around 0.7%. Woolworth trades on a forward P/E of 28x and an annual dividend yield of around 2.7% (fully franked).
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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