WOW - Woolworths Group

[ROE]

about 8 months ago I switch to shop mainly at Coles...

they are actually cheaper than WOW ... all stores around here are either new or got renovated...stunning looking stores make WOW look dirty and old....

WOW is going down because more people are shopping at Coles not deflation, that is just spin talk...

WOW got it too good for too long, Coles under WES is not an easy target, they are innovative and I was critical of WES when they took over Coles but Goyder proved me wrong.

I now wait for the price is right on WES and load up ...

 

[tinhat]

I heard a broker once summarise WOW as EPS growth = inflation + population growth. I guess we need to see the inflation figure as a deflation figure, add in pressure on margins from competitive forces and maturity in the industry structure (in terms of growth of supermarkets share of grocery and fresh food markets).

WOW is as defensive a defensive stock you can buy but without much upside these days. I don't really know why I own it. For income there are much better options out there. I can't see much upside to the share price in the medium term. That said it has some momentum behind it at the moment so it might get back up to its previous "point-of-control" midrange of $27 if there is some catalyst to kick it along like a rate cut. Then again I don't think the RBA will cut rates by more than 25 basis points in any one move and I don't think a 25 basis point cut in May will achieve diddley-squat for consumer confidence.

Let's face it WOW share price is in long term decline. I once had a target of $30 on it but I can't see the point of hanging out for that prospect to eventuate really.

I'm going to put WOW into the interrogation chair this weekend. I've been saying I'm going to sell down my WOW for some time now. Time to wack in a stop loss and hunt around for better opportunities or wait for a peak to sell for the cash.

PS: Also, I've never been comfortable having a stake in the gaming industry either.

 

[Ves]

The two are so often lumped together that it's hard to see why one would shop at one over the other, aside from convenience.

We shop at Woolies more than Coles. And it is just as you said, the most convenient of the two. There is a stand alone Woolies store near us. There are two Coles (and two more Woolies) close by but they are both in larger shopping centres and more bothersome to find parking and access. Apart from minor differences, I don't really see a big difference between the two. It generally depends more on the specific store, than the brand as a whole. Each have their own bad and good stores I have found.

 

[Tyler Durden]

Here's a question worth pondering (and one I don't know the answer to but would be interested in hearing others): What is WOW's customer proposition, ie why am I (or anyone) shopping at WOW instead of Coles? The two are so often lumped together that it's hard to see why one would shop at one over the other, aside from convenience. If it's a true prisoner's dilemma where by co-operating they maximise profitability then logically you would expect WOW's profitability to fall and Coles' to rise. Compare it to the UK, where each of the chains has some proposition (price/quality/brand (M&S)).

Just thinking out loud.

Good question, I've thought about it before as well.

Although I own WOW, I do 95% of my shopping at Coles, mainly because there is one near my work. If I walk 10mins more, then there is a WOW. Perhaps it's just me, but the lighting seems a lot better at Coles than WOW, which gives the effect that WOW is a bit run down.

I also find that the stuff I buy (roast chicken, chips) are more heavily discounted at Coles than WOW. I even asked my friend this, who works at WOW. I asked if things were cheaper at Coles than WOW and even he said yes.

 

[ENP]

WOW has in my opinion reached saturation point. It has limited growth to expand and reading the annual reports, the executive consider a 3-5% long term growth in revenues and net profit as a "great result".

It's just about got a shop everywhere in Australia or New Zealand where people need a supermarket, discount retailer, etc. (The only exeption being their home improvement section which has lots of scope for growth)

Consider this against other large ASX companies. CBA/ANZ, BHP, QBE. These large companies all see the benefit of expanding into Asia and the Pacific. They have realised that the expansion available in Australia is near saturation and they are expanding into markets to get some decent growth for share holders.

I have nothing against WOW, it's a good solid, reliable company that you know will keep in line with inflation and has a dependable dividend. However, I don't ever see it growing it's revenue, profits any more than the 5% or so that it has been over recent years.

 

[McLovin]

Interesting responses. I think it would be safe to say that for a lot of people, what keeps them coming back to WOW is fairly weak, the same is true of Coles.

Julia: I have heard from others that WOW has better fresh produce the Coles. I guess they are "the fresh food people". I think my Mum avoids Coles because the meat is not as high quality as WOW. That being said, she'll often buy her meat from a butcher and go to Coles, so it's hard to split them. They're almost like the banks!

WOW are maintaining their market share, so you would have to expect they are sacrificing margin in order to do so.

 

[oldblue]

It's just about got a shop everywhere in Australia or New Zealand where people need a supermarket, discount retailer, etc. (The only exeption being their home improvement section which has lots of scope for growth)

Not quite. WOW don't have an equivalent to Big W in NZ so there is scope for some modest growth there, if they ever decide to take that path. I wouldn't think that they would though, Big W is hardly a roaring success these days.

WOW have a 10% shareholding in The Warehouse in NZ, acquired in the days when WHS looked to be expanding their groceries section and a potential threat to WOW's growth. The other, bigger, supermarket chain in NZ, Foodstuffs, also has 10% of WHS which was acquired as a blocking move to WOW. I imagine that both WOW and Foodstuffs would like to be rid of their shares now that the WHS groceries threat has evaporated!

 

[MAKING MUSTARD]

Word is around Woolworths may be looking to buy the refrigeration service wing of Austral Refrigeration part of the troubled Hastie Group..... That tie up would reflect the Coles/CityFM joint venture

 

[notting]

it's hard to split them.

From a supermarket shoppers point of view. I was surprised by the business commentary about how WOW was so much better than Coles prior to the WES purchase! Never saw the difference. In fact some times I would go to Coles which was further away because I couldn't get stuff a few things from WOW.
I eat raw almonds a bit. So far I have found them to be 'fresher' at Coles than WOW!!!
Looks like I'm a Muppet today!!

 

[nulla nulla]

Although the recent share price looks like a spike that will have a subsequent fall, I would not be surprised to see Woolworths continue to trade sideways and upwards at a higher level than that of the period from mid February to the end of April.

The Annual report was still good despite the deflationary impact of the price war with other retailers. With each annual report the journalists like to sprook a negative spin on Woolworths with the "war" between Coles and Woolworths, however the reality is that Woolworths continues to grow market share and revenue off a larger base than that of Coles.

The recent RBA interest rate cut should mean more funds available in the consumers pocket for food, alcohol, cigaretes and petrol. No doubt this was a signifiacant contributor to the share price leap this week.

 

[noirua]

Yep! After holding WOW for many years it now looks to be building again after being wrong footed by Wesfarmers adding punch to Coles. May not do anything very dramatic and upside may stall around $33, imho, until evidence of a continued recovery is proven more solid -- content to hold.

 

[McLovin]

Something I noticed when I did a bit of research on WOW was the decline in revenue/$ of PP&E.

I guess they're just not getting out of their stores what they used to...View attachment 45873

The takeaway being that they will need to make a larger fixed asset investment for each additional $ of spending.

The trend above, highlighted in red, continues. That ratio of PP&E to sales has fallen to $5.75 for FY12. They haven't released the details of their development properties in their prelim report.

 

[Ves]

The trend above, highlighted in red, continues. That ratio of PP&E to sales has fallen to $5.75 for FY12. They haven't released the details of their development properties in their prelim report.

Do you know if a similar thing happened to Walmart?

I was having a quick look before and Walmart still has the same gross margin now (24%) that they had 40 years ago (26%). That's a phenomenal achievement. I am sure that operating margins have fluctuated a little bit. Significantly WOW has a gross margin of 25% on the 2012 figures if my calculations are correct. I find that to be an interesting symmetry. Operating margins are higher than they were 5 years ago too, perhaps they may mean revert a bit however.

The good thing about these businesses is that they're pretty predictable, and have many repeat sales, however the disadvantage in that is that the market usually prices them pretty close to value, and it's very hard to get a discount.

 

[McLovin]

Do you know if a similar thing happened to Walmart?

I don't sorry. I know that they are not as competitive (lower margins) for stores outside the Southern US. If you're interested, Greenwald has an entire chapter devoted to Wal-Mart in Competition Demystified.

I was having a quick look before and Walmart still has the same gross margin now (24%) that they had 40 years ago (26%). That's a phenomenal achievement. I am sure that operating margins have fluctuated a little bit. Significantly WOW has a gross margin of 25% on the 2012 figures if my calculations are correct. I find that to be an interesting symmetry. Operating margins are higher than they were 5 years ago too, perhaps they may mean revert a bit however.

Gross margins for most grocers are between ~23-26%. If you read some of the comments that the multinational food manufacturers have been making about the current Australian situation and how the lack of competition is squeezing their profits in Australia then you get some idea of how WOW is maintaining its margins. I know a guy who works for a company that supplies to WOW (they're large) and he says that WOW and Coles absolutely bend you over. If they are getting squeezed on price then they expect to recoup it from their supplier. From a business perspective WOW have done a great job at maintaining gross margins and expanding NPM.

The stat I've highlighted I think has more to do with the saturation of supermarkets. Realistically, how long can you build supermarkets for in a country that was already well served? Once Coles was reinvigorated it was harder for WOW to open new stores and get the same bang for their buck and existing stores had to deal with the new Coles. The ACCC has implied the same point, that there is an oversaturation of supermarkets at the moment.

 

[tinhat]

The stat I've highlighted I think has more to do with the saturation of supermarkets. Realistically, how long can you build supermarkets for in a country that was already well served? Once Coles was reinvigorated it was harder for WOW to open new stores and get the same bang for their buck and existing stores had to deal with the new Coles. The ACCC has implied the same point, that there is an oversaturation of supermarkets at the moment.

How much of the route trade and convenience store market do people think there is still left for the supermarkets to capture? Also, are Coles or Woolworths going to be worried about over-saturating specific geographic markets with supermarkets if in the long run it means forcing out independents (such as IGA owners) and convenience/street-strip retailers? The thing that worries me about WES and WOW more than supermarket growth is the future of their discount department stores, K-mart, Big W. There is so much of the market moving online for discount goods - not just entertainment and electronics, even discount clothing, home-wares and manchester.

 

[McLovin]

How much of the route trade and convenience store market do people think there is still left for the supermarkets to capture? Also, are Coles or Woolworths going to be worried about over-saturating specific geographic markets with supermarkets if in the long run it means forcing out independents (such as IGA owners) and convenience/street-strip retailers? The thing that worries me about WES and WOW more than supermarket growth is the future of their discount department stores, K-mart, Big W. There is so much of the market moving online for discount goods - not just entertainment and electronics, even discount clothing, home-wares and manchester.

Yeah the convenience store/petrol thing seems to be where it's at. I bought CTX last year when they started finally coming to the realisation that it wasn't sensible to be trying to compete against huge refineries in Asia and they should instead focus on selling the fuel at the bowser and getting people in the door to buy a Cherry Ripe and Coke. CTX probably gives you a good idea of how profitable WOW's petrol/convenience stores are.

Apparently Big W's online offering isn't too bad. Don't know too much about it though.

 

[Ves]

I don't sorry. I know that they are not as competitive (lower margins) for stores outside the Southern US. If you're interested, Greenwald has an entire chapter devoted to Wal-Mart in Competition Demystified.

I have it on my shelf - it's an excellent chapter.

Gross margins for most grocers are between ~23-26%. If you read some of the comments that the multinational food manufacturers have been making about the current Australian situation and how the lack of competition is squeezing their profits in Australia then you get some idea of how WOW is maintaining its margins. I know a guy who works for a company that supplies to WOW (they're large) and he says that WOW and Coles absolutely bend you over. If they are getting squeezed on price then they expect to recoup it from their supplier. From a business perspective WOW have done a great job at maintaining gross margins and expanding NPM.

Indeed - I think Wow (and possibly WES) have salient competitive advantages that have been built over decades. They're going to be super-hard to break (failing extreme government intervention that I don't think will come). People keep talking about overseas giants coming to break up the dominance, but it has not happened as yet (or at least has not been successful). I think WOW is as close to a blue-chip as you can get on the ASX, but unfortunately they are now ex-growth (unless you think Masters will turn into a big cash cow). Still, at the right price, it is a reliable dividend stream.

The stat I've highlighted I think has more to do with the saturation of supermarkets. Realistically, how long can you build supermarkets for in a country that was already well served? Once Coles was reinvigorated it was harder for WOW to open new stores and get the same bang for their buck and existing stores had to deal with the new Coles. The ACCC has implied the same point, that there is an oversaturation of supermarkets at the moment.

I agree 100% - the same thing has happened to JB Hifi. Actually, most of the big chain names in Australia are close to saturation. They all rely on population & urban expansion.

Geoff Gannon on Gurufocus mentions this in regards to one of the reasons that he doesn't like retailers too much in one of his articles. There is only so many stores you can build. I will try to find it tonight if I remember.

 

[JTLP]

I'm not saying that Aldi is the 3rd player but they are doing nicely on the share of $ front - taking a nice slice from the other 2.

When s#!t hits the fan and people are scraping cents together + the fact that Aldi will become more socially acceptable to shop at to the majority - you may see some slowing in the big 2.

One thing that will keep $$$ in their pockets is their pump to P/L - ambitions in the 25% range of total grocery...They didn't hire all those ex UK supermarket chiefs for nothing

 

[nulla nulla]

It is more likely that the real competition in the long run will come from some-one like costco in respect of food alcohol and petrol. Woolworths has the advantage in realestate accumulated over the years and expanding into Hotels (with their poker machine licences) and the development of the joint venture with Masters. Everyone else is effectively trying to play catchup.

As much as they like to believe they are scoring points off Woolworths, the opposition isn't. Woolworths continues to grow, developing market share and increasing annual profits. If the opposition is growing, it is at the expense of the smaller players, not Woolworths.

The next legup for Woolworths will be vertical integration.

The four year chart is the best demonstration of where Woolworths has been and where it is likely to go next (?).



Woolworths has recently breached the October 15, 2009 peak of $30.57 when it hit $30.88 on 5/9/2012. The next challenge is the December 12, 2007 peak of $34.67. As lways D.O.Y.R and good luck.

 

[skc]

WOW...

Sold Dicksmith for some lose change of $20m.

DickSmith had HY sales of $873m and EBIT of $19.5m. So the equity was worth 0.5x full year EBIT

Not sure how the future upside works, or how much debt is within the Dicksmith unit. But it really isn't a large number, is it?!

FWIW, JBH trades at 5.5x, although direct comparison isn't fair due to the unknowns.