Woolworths Research

Woolworths (WHL) – Missing out on the PnP windfall

Woolworths’ 1H24 results were disappointing, with weak topline growth and declining EBIT margins in FBH and CRG. This momentum has continued in 2H24, making the company increasingly reliant on its Food division to deliver any meaningful returns.

While the Food business has delivered good results for 1H24, viewed in the context of the ailing Pick n Pay supermarkets (PnP), we think WHL Food may not have capitalised on the opportunity to capture more of the lost PnP market share. Our analysis indicates that PnP may have shed market share equivalent to c. R15bn (annualised), which seems to have been mostly captured by Checkers (SHP). This may have contributed to management elevating their risk assessment of the Food business’ market leadership position from “possible” to “likely”, as reported in its 2023 integrated report. The return to normalised GPMs after its price investment programme ended could hinder WHL Food from benefitting from the market share losses of PnP Supermarkets, in our view.

The slowdown in FBH sales growth in 1H24 raises the question of how sustainable the turnaround reported in FY23 was. We are concerned that the late stock deliveries – which seem to have been received in 2H24 but were not included in the clearance sales in January – raise the risk of markdowns by the FY24 year-end.

CRG is planning to grow its footprint in a challenging Australian market, which could result in lower trading densities and negatively impact margins.

Given WHL’s R10bn capex plan over the next three years, coupled with its share buyback programme, we consider the cash flow risk for this retailer.