Woolworths Research

Woolworths (WHL) – Unlocking value

WHL delivered good results for FY22, with the FBH division staging a turnaround in 2H22 and the Australian divisions rebounding after lockdowns were lifted. The space cuts in FBH over the past two years have increased trading densities. Plans to roll out small-format W Edit stores are interesting, but we caution that these formats typically have higher operating costs and could impact margins.

The food business disappointed, with weak turnover growth and lower margins. Management attributed the performance to a high Covid base, but we think there may be other factors at play. We believe that WHL Food’s target market may be shrinking, as weak economic conditions are resulting in fewer consumers moving up the LSM scale and emigration increasing. We look at the performance of WHL Food in the 1990s when a similar spike in emigration happened.

David Jones performed well after the lockdowns, but a sobering comparison to the business WHL bought in FY15 for AUD2.2bn shows the extent to which this business has changed. Its turnover has not increased significantly and, while space has been reduced and trading densities increased, margins have dropped considerably. We believe a sale at an estimated book value of AUD800m could be a positive outcome, but a low-ball price close to the tangible asset values of about AUD400m to AUD600m is possible.

CRG did well on topline growth, and the space reduction of 18.4% since FY19 has increased trading densities by a 5.9% CAGR over the past three years. A new initiative is planned for FY24, which will add 51 new sites and increase space by 11 000m2 that year. We calculate that this initiative will have an average store size of 216m2, suggesting small, stand-alone stores.

WHL plans to invest R10bn over the next three years. We are concerned that the allocation of substantial capital during a period of low expected economic growth in South Africa may not provide an adequate return.