WOW financial analysis

Woolworths Limited – Market Related Information
Woolworths Limited is an Australia-based company, which operates across the segments of food and grocery, liquor, petrol, general merchandise and consumer electronics, hotels group and wholesale group. The Company represents some of the most recognisable and trusted brands in retailing (Woolworths Ltd.).

Food and grocery, liquor and petrol outlets as well as supermarkets comprise the supermarket division of the Company’s operations. BIG W discount department stores are a part of the general merchandise group. Dick Smith Electronics, Tandy and Dick Smith Electronics Powerhouse stores are included into the consumer electronics group. The hotels group offers accommodation, food, on premise liquor sales, gaming and venue hire. State-wide independent wholesalers (SIW) comprise the wholesale group for the Company (Corporate Information, 2010). Woolworths Limited primarily operates in Australia and New Zealand, but also has partnership with TATA group in India as well as its own Asian buying office in Hong Kong (Woolworths Limited, 2010.). The partnership with the largest private sector group in India is aimed at developing a network of consumer electronics retail store in the country, where the Company provides wholesaling and some retail management expertise (Woolworths Limited 2010). The Company’s Asian buying office was created with the aim of increasing the amount of direct sourcing for general merchandise products, which are produced in Asia so that to gain greater control over product quality, factory compliance and traceability (Woolworths Limited 2010). According to the Annual Report for the fiscal year 2009, Woolworths Limited operated 3,162 in Australia and New Zealand, 951 supermarkets under the Woolworths and Safeway brands in Australia and under Woolworths, Countdown and Foodtown brands in New Zealand, 542 co branded Woolworths/Caltex petrol canopies across Australia, 156 BIG W stores and 436 electronics outlets across Australia and New Zealand as well as 280 premium hotels. Within the partnership with Tata group, Woolworths Limited provides wholesale services to 33 retail outlets under the Croma brand name.
Woolworths Limited is listed on the Australian Securities Exchange, where its stock has been traded in the price range from AU$ 25.31(as for February 9, 2010) to AU$ 28.85 (as for August 27, 2010) since January 2010. The Company is listed the first out of 213 in the consumer sector by market capitalisation of $34,720 million as of June 10, 2010 (ASX, 2010).
Since the beginning of the year the stock price was falling until February 24 when Woolworths Ltd declared dividends to be payable in March. Since then the price for the Company’s stock fluctuated in the mentioned above price range in response to the movements in world financial, oil, and gold markets. By July 29 the price fell to the level of AU$ 25.56 due to two factors – first, the concern over weakening growth in China and a slump in US consumer confidence (Nazareth, Kirkland) and secondly the announcement of slower growth than had been earlier expected and forecasted by the Company (Koons, 2010). However, a positive kick in was from early election call, which, according to Michael Luscombe, will not affect the sales during holiday season and provide for high sales for discretionary retailers (Fenner, 2010). The price for the Woolworths Limited’s stock increase after the Company announced about its intention to return $700 million to shareholders through share buy-back scheduled for September-October 2010. In the press-release, it was claimed that return of over $1 billion to shareholders combined with $1.3 billion in dividends and $325 million capital buy back that occurred in the first half of calendar year, “the shareholders will benefit from the improved earnings per share, improved dividends per share and improved return on equity following the Buy-Back” (Woolworths Limited, 2010). However, the stock buy back as well as capital buy-back are intended to be funded via long-term debt, which will impact capital structure and reliance on debt. Nevertheless, according to Luscombe, due to capital management initiatives in light of investment and growth opportunities available, the Company will focus on maintaining high credit ratings and enhancing shareholder value (Woolworths Limited, 2010). The closing price as of August 28 went up by $0.31 and 1.13% change from previous close, whereas on the announcement day the price of stock had 2.38% in positive change from the previous close on August 25.
Woolworths Limited – Finances
The Company’s annual reports and financial statements reflect quite healthy condition of its operations. The sales and net profit figures have been increasing over, though at a slower rate for the last fiscal year 2010 as estimated in the Company Results for the year ended 27 June 2010. Thus, for the fiscal years 2008 and 2009 the sales were $47 and $49.6 respectively, which provided for 5.5% growth for the period, whereas growth in 2010 was 4.2%. The interim financial report as of January 3, 2010 also shows increase when compared against the same period of 2009. The sales during fiscal year 2010 increased by 4.2%. The return on net sales has shown an upward trend as well and was 3.5%, 3.6%, and 4.1% in fiscal years 2008, 2009, and half year 2010 respectively. Although the growth in sales did not prove the expectation of being in upper single digits, the net profit after taxes increased in line with expectations for the last fiscal year and by 10.1%, when the NPAT in previous years of 2008 and 2009 was 25.7% and 12.8% respectively. However, a slowdown in growth rate of sales and net profit may also be attributed to the tightened conditions in the consumer market.
Return rates for Woolworths Limited were stable for the previous years and increased in the year ended June 27, 2010. Thus, the return on assets for the fiscal years 2008 and 2009 was 11% and 11.4% respectively, whereas in 2010 ROA is 15%. However, when compared to the industry average of 0.48 and sector average of 2.06, the return on assets at Woolworths Limited is quite high implying that the management efficiently uses its assets to generate sales.
Return on equity for the years 2008 and 2009 was 28 and 28.1 percent respectively, whereas in the fiscal year 2010 it is estimated to be 26 percent. However, the return on equity is likely to improve when the Company executes stock buy-back, which would result in greater return to shareholders.
The financial strength of the Company indicated by the measures of ability to pay debt, namely debt ratio amounts to 60.2, 58.69, and 57.7 percent for the fiscal years 2008, 2009, and 2010 respectively. Whereas debt to equity ratio is 151.4, 142 and 136,48 for the fiscal years 2008, 2009, and 2010 respectively. Thus, Woolworths Limited strongly relies on debt financing, which to some extent may endanger returns to shareholders when compared to the industry average of 24.69 and sector average 27.52. However, the debt to equity ratio is lower than S&P 500 average of 186.51. Nevertheless, interest coverage for Woolworths Limited indicates the company’s strengths and ability to generate enough operating income to cover financing charges risk default on debt obligations and amounted to 10.96, 11.97, and 12.92 times in 2008, 2009, and 2010 respectively.
Earnings per share declared in the financial statements of the company were 134.89, 150.71, and 164.01 cents in 2008, 2009, 2010 respectively, which indicate EPS growth of 9% in the last fiscal year. EPS for 2010 and the market closing price of Woolworths’ stock on August 27 of AU $27.85 indicate the price to earnings ratio of 16.98, which is significantly higher than industry average 5.73, though a little higher than sector average of 14.45. The dividend yield for the last accounting period is 3.96, and dividends increased by 10.58 percent.
In summary, the market information on and financial statements of the Company indicate positive conditions for investing opportunities. Although, playing in the stock market through constant buying and selling Company’s stock is not likely to bring instant benefits, holding onto the Woolworths Limited’s stock is a safe investment in terms of guaranteed returns in dividends, which companies pays on annual basis.


Leave a Reply