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Woolworths - Sound HY20 Results But The Share Price Down

Max Molinari

Max is an Equity Analyst with ASR Wealth Advisers. He has studied a Bachelor of Business and a Bachelor of Laws at the University of Technology, Sydney. Max currently holds RG146 qualifications.

Woolworth’s (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 $A53.8 billion. Woolworths has over $A60 billion of sales annually. This represents around 20 per cent of retail sales in Australia. In terms of food and grocery sales, Woolworths market share is around 37 per cent compared to Coles' market share of 29 per cent.




What are the recent changes in Woolworth’s business operations?

In the last few years, Woolworth closed down the Master hardware business in 2016, sold the petrol retail business (completed in April 2019) and is currently downsizing the Big W business by closing stores (around 30 over a 3 year period). In addition, on 3 July 2019 it announced plans to divest the Endeavour Group. These businesses represent around 30 per cent of Woolworth’s earnings before interest and tax (EBIT). The sale could be executed by way of a trade sale to another party or through a demerger.


What are the key features of Woolworths HY20 report?

Revenue from continuing operations increased by 6.4% to A$32.4 billion, EBIT increased by 11.4% to A$1.9 billion and net profit after tax increased by 15.7% to A$1.0 billion. Importantly, the dividend increased to 46 cents per share (fully franked) in HY20 from 45 cents per share in HY19, a rise of 2.2%.


What are the drivers of this result?

The result reflected consistent growth across all business units.

In Australian Food, revenue increased by 4.8% and EBIT increased 6.4%. Growth of 38.1% in online sales was exceptionally strong and online sales now represents 4.4% of total sales. Australian Food benefitted from strong sales growth over Christmas period and sales per square metre rose 3.5%.

In New Zealand Food, revenue increased by 4.8% and EBIT increased 6.4%. The business benefitted from a number of successful promotional campaigns.

In Endeavour Drinks, revenue increased by 4.7% and EBIT increased 6.7%. This growth was due to a number of new store openings. However, promotional activity by a competitor resulted in weaker sales in the December quarter. Woolworths is making progress on divesting the Endeavour Drinks and Hotel businesses and continues to expect completion of this transaction in 2020.

In Hotels, revenue increased by 6.2% and EBIT increased 8.3%. The Hotels business had successful Christmas and new year events which helped boost sales.

In Big W, revenue increased by 2.8% and achieved EBIT of A$50 million. This is the first time since 2016 that Big W recorded a positive EBIT number. However, market conditions in the market segment Big W operates in remains subdued reflecting weak consumer spending.


What is the outlook for Woolworths?

Management did not provide specific earnings guidance. On the positive side, the businesses will benefit from the opening of new store and strategic initiatives to build existing businesses. On the negative side, the ongoing drought in Eastern Australia and subdued consumer activity presents challenges.

Woolworths is a defensive stock, with comparatively stable earning 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.


What is the market reaction?

The market reaction to Woolworths’ HY20 result is broadly neutral. The Woolworths share price is down around 2.6% following the announcement of the HY20 result and is currently trading at A$40.78. This downward movement mainly reflects that the ASX200 is down around 2%. Woolworths trades on a forward P/E ratio in the high twenties and a dividend yield of around 2.5% (fully franked).




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).

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ASR has no position in any of the stocks mentioned.

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