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CFA Institute Research Challenge
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CFA Society Sydney, Australia
The University of Sydney
Woolworths Australia Limited (WOW.ASX)
Food Fight: The New Reality for Australian Grocers
We initiate coverage on Woolworths Australia Limited (WOW.ASX) with a SELL recommendation
and price target of $29.27, representing a 16.5% downside from the current price of $35.07. The
Australian grocery market is re‐fragmenting and the period of oligopolistic consolidation which
SYDNEY UNIVERSITY RESEARCH
GROUP
historically fostered WOW’s growth is drawing to a close. As Management has failed to
implement strategic growth opportunities in the wake of increased competition and a resurgence
in discount grocers, we do not see support for the current price.
SUPERMARKETS | CHANGING OF THE GUARD
‐ Industry re‐fragmentation represents a material threat to WOW’s core Food and Liquor (F&L)
WOW.ASX SELL segment (76% of sales). Stagnant real wage growth and heighted consumer price awareness
GICS Industry: Food & Staples Retailing have acted as catalysts for the bifurcation of Australian grocery expenditure. Instead of
GICS Sector: Consumer Staples
weekly ‘one‐stop shops’, consumers are increasingly making bulk‐value purchases at discount
grocers (ALDI) and periodically shopping at specialist retailers (Harris Farm Markets). We do
Target Price: 29.27 not believe WOW’s ‘all‐in‐one’ model is sufficiently positioned to accommodate this shift in
Last Price 19/09/2014 35.07 consumer demand.
‐ The Australian consumer’s appetite for discount supermarkets, once fulfilled by Franklins, is
52 week high 38.92
now being satiated by ALDI. Buoyed by a resurgence in private‐label products, the German
52 week low 32.42 grocer has gained ~10% market share since 2001 and outperforms all Australian competitors
Market capitalisation ($bn) 44.06 on ‘known value indicator’ metrics. As ALDI succesfully executes an aggressive expansion
Shares (m) 1,248 strategy, we expect material erosion to WOW’s 39.5% market share.
CAPITAL MANAGEMENT | DESTROYING SHAREHOLDER VALUE
‐ Management has failed to drive new sources of growth. Despite facilitative negative working
capital from the scaled supermarket business, WOW has engaged in projects that distract
from its core business:
> Masters: WOW has fundamentally misunderstood the Australian Home Improvement
market. In misapplying Lowes’ American experience, the Master’s business has
Price History Rebased persistently failed to meet growth expectations; posting an FY14 loss of $169m. In the
2.0
absence of renewed guidance from Management, and noting it took Bunnings decades to
build a 17% share of the fragmented hardware market, we do not expect Master’s to
1.5
materially contribute to profit until at least FY17.
> Premium Services: We do not see value in the roll out of in store services such as sushi
and pizza bars, which serve to (1) increase Woolworths’ cost of doing business (up 20bp
1.0
to 20.9% FY14) and (2) adversely impact price perception, on which Woolworths trails
Coles and ALDI.
0.5
> Online Retail is undoubtedly an important market trend. However, as it only comprises 3%
of F&L sales, Mercury Two disproportionately focuses on enabling “click and collect”.
0.0
FY09 FY10 FY11 FY12 FY13 FY14
SUPPLY CHAIN DECAY | IS THE “VIRTUOUS DOUBLE LOOP” SLOWING?
‐ Supply chain reforms are a necessity. FY14 F&L Inventory DSO have risen to 34.1 (excl.
WOW ASX200
Masters), a level not seen since FY03. Improving inventory turnover is critical, as interest free
Source: Bloomberg gearing is created from the timing gap between customer and supplier payments. Slowing
inventory turnover impacts stock freshness and limits WOW’s ability to achieve volume‐
driven productivity gains. With project leader Julie Coates leaving 10 months in to the 5 year
reform, we are concerned for effective execution of Mercury Two.
Total Area and Return on Funds
Employed VALUATION | 16.5% DOWNSIDE
2,600 32% $m AUD FY13 FY14 FY15 FY16 FY17
Area sqm '000
2,500 31% Revenue 58,516 60,773 63,786 65,780 67,891
2,400 30% Gross Profit 15,762 16,478 17,292 17,695 18,127
29% EBITDA 4,619 4,772 4,946 4,893 4,841
2,300 NPAT 2,359 2,459 2,545 2,441 2,363
28%
2,200 Gross Margin 26.9% 27.1% 27.1% 26.9% 26.7%
27%
2,100 26% Net Margin 4.0% 4.0% 4.0% 3.7% 3.5%
2,000 LT Debt to Assets 19.2% 17.1% 15.9% 14.6% 13.3%
25%
Net Interest 12.3x 14.5x 15.3x 15.1x 15.1x
1,900 24%
Return on Equity 25.3% 23.3% 22.0% 19.4% 17.4%
FY10 FY11 FY12 FY13 FY14
EPS ($) 1.91 1.91 2.03 1.93 1.86
Total Area (LHS)
ROFE (RHS)
Source: Company Reports
BUSINESS DESCRIPTION
Revenue Contribution FY14 BUSINESS SNAPSHOT | OPERATIONS
2.5% 2.4% Woolworths Australia Limited (ASX: WOW) is Australia's largest retailer. Established in 1924 and
7.2% headquartered in Sydney, WOW has over 180,000 employees and serves 28 million customers a
week. The business operates in Australia and New Zealand across the following segments:
F&L
11.6%
Petrol
Food & Liquor: is Woolworths’ largest segment; generating $41.17bn in revenue (76.3% of total
BIGW sales). WOW operates full‐service, medium‐size supermarkets with around 45,000 SKUs.
Home Approximately 15% of total sales are derived from private label goods. This is in stark contrast to
Hotels
ALDI, who stocks approximately 1500 SKUs, 90% of which are private label. Within Australia, WOW
76.3%
has 39.5% grocery market share, operating 931 supermarkets and a further 11 trading as Thomas
Dux. In New Zealand (FY14 Sales of $5.19bn), Woolworths operates 171 Countdown supermarkets.
Source: Bloomberg, Company Reports In addition, WOW is Australia’s largest liquor retailer, operating Australian liquor retailers Dan
Murphy’s, BWS and Cellarmasters. Currently, 3% of food and liquor sales are generated online
($1.2bn). This is expected to change however, following increased investment in online capacity,
Earnings per Share
services such as “click and collect” as well as dark stores.
1.97 2.07 Fuel: WOW controls 24% of Australian fuel retailing, both independently (502 stations) and
1.76 1.79 1.90
1.65 under a joint venture with Caltex (131 stations). Petrol sales generated $7.06 billion in revenue in
FY14 (11.6% of group sales).
Home: WOW operates within the Home Improvement Industry through wholesale provider
Danks and retail providers Home Hardware and Masters. Home generated $1.53bn in FY14 sales,
(2.5% of group sales) and controlled 7% market share. In FY12, WOW established Masters in
partnership with US‐owned Lowes (1/3rd ownership). The business is yet to achieve scale, with a ‐
FY10 FY11 FY12 FY13 FY14 FY15E $169m EBIT result and no new breakeven guidance. Notably, Lowes holds a put option through
Source: Bloomberg, SURG Estimates which it can divest its Masters holdings at fair value.
Hotels: Through the ALH Group WOW is Australia’s largest pub operator (329 locations). Hotels
are WOW’s most profitable segment, contributing $1.47bn in FY14 sales with an EBIT/Sales ratio
Group EBITDA Margin of 18.71%. In addition, WOW is Australia's fourth largest owner of poker machine licenses. Hotels
provide liquor retailing rights in Queensland, where liquor licenses are attached to venues.
7.92%
7.74% 7.73% General Merchandise: Through discount retailer Big W, WOW stocks a range of products from
7.44% toys to clothing apparel. The business contributed $4.35 billion in sales in FY14 across 182
7.09% locations. In an attempt to improve profitability, WOW is consolidating Big W and NZ based EzyBuy.
6.61% Financing: WOW distributes personal insurance through HFS and credit cards via HSBC. The
business segment has recently been revamped as ‘Woolworths Money’, gearing up to compete
with Coles credit cards.
BUSINESS SNAPHOT | COMPANY STRATEGY
FY10 FY11 FY12 FY13 FY14 FY15E WOW’s strategy is built on four key pillars, (1) Extend leadership in food and liquor, (2) Act on the
Source: Bloomberg, SURG Estimates firm’s portfolio (3) Build new growth businesses and (4) Increase investment in existing capabilities.
(1) Extend leadership in food and liquor: WOW aims to stem the loss of F&L market share
through improving consumer price perception and via new service offerings. A key component of
this strategy is the Everyday Rewards loyalty program. Through targeted discounts, WOW aims to
encourage customer retention and improve the perceived competitiveness of its offering.
Group Return on Invested
Capital Additionally, WOW continues to employ significant capital expenditure in rolling out new stores;
11.17% 30 new supermarkets and 10 new liquor stores were opened in FY13. Increased competition from
Coles and ALDI, however, has seen WOW’s ROIC steadily decline over the past five years.
10.60% (2) Act on the firm’s existing portfolio: BIG W has been materially affected by the growth in
10.27% online retail. In response to flat and declining sales, WOW acquired NZ online retailer “EzyBuy” and
10.10% 10.16%
9.96% is in the process of integrating this business with Big W. Management has advised that
restructuring costs will be incurred in the short run. Additionally, consistent with WOW’s policy of
entering into long term leases rather than holding property assets, WOW announced the sale and
leaseback of 54 freehold properties for $603 million in September 2014.
(3) Build new growth businesses & (4) Increase Investment in Existing Capabilities: Masters has
FY10 FY11 FY12 FY13 FY14 FY15F underperformed expectations since its establishment in FY12. WOW continues to invest in this
business in an attempt to achieve scale.
Source: Company Reports, SURG Estimates
BUSINESS SNAPSHOT | OWNERSHIP
WOW has a predominantly flat shareholder structure, the majority of which is comprised of retail
investors. Of the 340 institutional investors, Vanguard is the largest shareholder (1.82% holding).
2
BOARD OF DIRECTORS BUSINESS DETAIL | CORPORATE GOVERNANCE & SOCIAL RESPONSIBILITY
WOW has sound corporate governance and sufficiently fulfils Australia’s prudential regulatory
requirements. To ensure that WOW meets high levels compliance standards, a number of
NOMINATION COMMITTEE committees have been established, including the Nomination, Audit, Risk Management and
Compliance Committees. In addition, WOW attempts to maintain strong community partnerships,
AUDIT, RISK, investing 1% of pre‐tax profits in community projects and initiatives.
MANAGEMENT &
COMPLIANCE COMMITTEE In recognition of the firm’s commitment to responsible reporting, WOW is the only Australian
retailer listed on the Carbon Disclosure Project Leadership Index. However, we identify the ALH
PEOPLE COMMITTEE Group as Australia’s 4th largest operator of poker machines. While the firm was awarded the
“Socially Responsible Operator of 2012”, we recognise that gambling may be an issue for
Source: Company Reports
individuals pursuing Socially Responsible investment strategies.
INDUSTRY OVERVIEW & COMPETITIVE POSITIONING
Australian Retail Market Share (%) AUSTRALIAN SUPERMARKETS | CHANGING OF THE GUARD
Fragments of the Past
The Supermarket and Grocery Stores industry is one of the most concentrated in Australia. For
years the incumbents Woolworths and Coles, have operated as a near‐duopoly, commanding more
than 70% market share through an ‘all‐in‐one’ full‐service offering. However, a number of factors
precipitate the end of this period of dominance. Subdued growth in real wages and heightened
consumer price awareness have fostered an environment in which consumers feel less affluent. As
a result, instead of weekly, ‘one‐stop shops’, consumers are increasingly making bulk‐value
purchases at discount grocers (ALDI) and periodically shopping at specialist retailers (Harris Farm
Source: Bloomberg, Company Reports Markets). While this structural shift has provided tailwinds for grocers operating in these niches, it
is expected to place downward pressure on the full‐service incumbents.
The Rise of Discount Stores…
Australian consumers seeking value for money are turning to discount stores and private‐label
% of Consumers who switch service
providers in a year products. In FY14, 70% of consumers purchased a mix of private labels and brands and only 3%
utilised the same supermarket brand exclusively. Importantly, however, this appetite for discount
supermarkets is not new. In the late 1990s, “No Frills” retailer Franklin’s commanded 13.6%
national market share despite only operating in NSW and QLD. Despite this, a lack of scale and
purchasing power undermined Franklins' competitiveness and ultimately resulted in Australia's
'Original Discount Grocer' being acquired by Metcash. By offering high‐quality, home‐brand
products, ALDI has filled the void left by Franklins; capturing 10% of the Australian market since
2001 (see appendix 29). As ALDI commands an average market of ~20% in the countries in which
it operates, the German Grocer poses a significant threat to Australian grocers.
…and the fall of the price lever
Source: IBISWorld Industry Report G4111
Price inflation has historically been a key source of growth for the Australian supermarket industry.
However, the resurgence in private‐label demand and campaigns such as Coles’ “$1 milk, $1 bread”
has increased the importance of consumer price perception as a key differentiator. Of the
incumbents, Coles' strategy has ostensibly been more successful. Under the ownership of
% of Australians over 14 who are Wesfarmers, Coles comparable sales growth has surpassed WOW’s for 12 consecutive quarters.
members of a loyalty program
Private‐label products, moreover, account for approximately 25% of Coles’ supermarket revenue
compared to WOW’s 15%. In addition, while a recent survey has shown that ALDI is the clear winner
40%
in the price perception battle, Coles is perceived to offer lower prices than Woolworths in many
"Known Value Items" (KVIs) – key staple products of which consumers are price aware. As such,
30%
both the actual and perceived competitiveness of traditional grocers has come under threat.
20%
Big Data: Focus on Loyalty Programs
10% Large supermarket players have invested significantly in “Big Data” to gain a deeper understanding
of consumer spending patterns and improve their existing loyalty programs. Currently,
0% Woolworths’ Everyday Rewards program is a market leader, with WOW targeting its 8 million
FY09 FY10 FY11 FY12 FY13 FY14 members using knowledge gained from its acquisition of big data firm Quantium. However, while
Woolworths Coles an agreement with aircraft carrier Qantas has helped sustain WOW’s lead, this position has come
Source: Roy Morgan Survey – Australian
under threat by Coles’ revamped loyalty scheme. In particular, the “my5” offer, in which customers
Consumers 14+; June 2014 receive 10% off their five favourite groceries when they spend $50, is likely to attract new
customers and increase customer loyalty.
3
Store Expansion New Stores Edging Supermarket Sector to Overcapacity
Sales Capacity expansion is crowding out Australian supermarket sector growth. The successful re‐entry
New per Total Share of discount supermarkets has reversed the period of oligopolistic consolidation that characterised
Store Store Sales (%)
the industry over the past 10 years. This has led to slower organic growth and a reduced number
WOW 20 35 700 32.7
Coles 20 26 520 24.3
of consolidation opportunities at a time when every major retailer is planning significant capacity
MTS 50 8 400 18.7
expansion. With new store expansion outpacing volume growth, it is expected that approximately
ALDI 35 13 450 21.0 $2 billion in sales pa will be taken out of annual industry growth. This parallels the experience of
Costco 1 70 70 3.3 Tesco (Appendix 10.1.e). As existing stores fight for residual growth, comparable store sales will
126 2,140 100 likely fail to keep up with the increase in store costs, putting downward pressure on industry
profitability and returns.
Source: Company information, SURG
Estimates FUEL | 4c Fuel, $5 Fish
Through alliances with Caltex and Shell, both Woolworths and Wesfarmers have emerged as key
players in the fuel retailing industry. Each operates 630 and 613 canopies respectively. The rise of
Market Share of Fuel Retailing Industry
co‐branded canopies, however, has been largely driven by the ‘fuel discount offers’ made to
supermarket customers that make qualifying purchases in Woolworths or Coles stores. In 2008,
this discount rose to as high as 16 cents per litre discount for petrol. In response to increased
pressure from the Australian Competition and Consumer Commission (appendix 27), both Coles
and Woolworths resolved to limit fuel discounts. Offers are now limited to 4c per litre, and all fuel
savings offers must be funded from within their fuel retailing operations. In the absence of this key
competitive advantage, growth in co‐branded canopies is expected to remain subdued.
HOMES AND HARDWARE | The Big Box Home Improvement Market – Reaching Saturation?
The Australian Home Improvement market represents a significant opportunity for both WOW and
Coles. However, this market has a natural saturation point, as big‐Box stores cannot compete in
regional areas or in specialist dominated product lines. Using the US as a case study, Big Box market
operators began slowing store rollouts and concentrating their efforts on expanding into other
markets – Home Depot to Mexico and Lowe’s to Canada – when either (1) 48% Market Share was
Source: IBISWorld Industry Report G4000 reached or (2) when population per store reached 80,000. This compares to Australia which
currently has a population per store still marginally above 100,000 and a smaller market size. Thus,
in assuming both Bunnings’ and Masters’ current store roll out rate persists, the Big‐Box market
Market Share of Pubs, Bars and could reach saturation point within the next 3 years. For firms that have not reached scale, this
Nightclubs Industry would result in considerably diminished margins and subdued growth opportunities.
HOTELS & PUBS | Business as Usual
The Hotels and Pubs industry has experienced stable growth despite increased regulatory scrutiny,
changes to gaming requirements and increases in alcohol excise taxation. As such, this segment is
expected to grow in line with Australian household discretionary income, tapering slightly due to
declining consumption of alcohol per capita.
INVESTMENT SUMMARY
Source: IBISWorld Industry Report
H4520 We initiate coverage of Woolworths with a SELL recommendation and a target price of $29.27,
representing a 16.5% downside from the current price of $35.07. We do not see support for the
current share price given (1) WOW’s ‘all‐in‐one’ model is threatened by industry re‐fragmentation
(2) Management has persistently failed to execute new growth opportunities, and (3) supply chain
efficiency is declining.
Perceived price relative to ALDI (%) SUPERMARKET RE‐FRAGMENTATION | DISCOUNT RETAILERS AND SPECIALISTS PERFORM
WOW’s all‐in‐one’ model is significantly threatened by industry re‐fragmentation. We believe that
by attempting to incorporate a two tiered (discount and full‐service) offer within the same store,
WOW will fail to achieve success in either.
Discount
WOW has failed to stem market share loss to discount grocers. Strategies such as Loyalty points
(Everyday Rewards), fuel discounts, and loss leading offers have failed to improve WOW’s perceived
price performance; the firm lags behind both Coles and ALDI on almost all KVI metrics. Crucially,
these products disproportionately frame price‐value perceptions and drive consumers to switch
stores when pricing is not aligned. Further, as WOW’s lease adjusted margin (9.3%) is one of the
highest in the world, a material margin reduction will significantly impact the firm’s profitability.
Source: Bain & Company: The New Reality
for Grocery Suppliers in Australia 4
WOW & ALDI Market In addition to perceived price performance, WOW is unable to achieve actual price competitiveness
Share: Eastern Australia with discount retailer ALDI. As WOW maintains a premium range of 45,000 SKUs compared to
50% 15% ALDI’s 1,250, the latter has a fundamentally lower cost base. Supermarket history indicates,
moreover, that there is a significant appetite for discount supermarkets from the Australian
40% 12%
consumer, as Franklins attained a 13.6% market share. As ALDI averages ~20% market share
30% 9% internationally, we expect the German grocer to take material market share from Woolworths.
20% 6% Specialists Here to Stay
10% 3% WOW’s focus on offering in‐store premium services is an identity crisis. Serving barista coffee, and
freshly cooked food such as pizzas and bakeries increases WOW’s cost of doing business (+20bps
0% 0% FY14) and decreases WOW’s perceived price competitiveness. At the same time, a strategic focus
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
on discount products reduces the perceived quality of WOW’s specialist products. As such, we do
not believe WOW will capture sufficient market share from specialist providers, particularly well
Woolworths (LH) ALDI (RH)
recognised brands such as Domino’s Pizza (13.4% market share). In addition, as Coles is pursuing a
Source: ABS, Bloomberg, SURG Estimates similar store enhancement policy, this strategic direction offers little competitive advantage. Thus,
with 61% of consumers shopping with both specialists and supermarkets each week, we see no
abatement to the success of specialists in Australia.
PRICE CATALYSTS: Despite ALDI’s rise, the market is overly complacent in forecasting WOW’s
market power. Incremental market share data will reveal the extent of dual losses to discount and
Historical Hardware Revenue specialists, undermining valuation with downward revisions in revenue growth and cost control.
5,510
5,140
4,740
4,240 4,470 CAPITAL MANAGEMENT | NO MASTERS OF GROWTH
3,860
Masters – A Low(e) Point
In applying the experience of its American partner, WOW has fundamentally misunderstood the
fragmented nature of Australian hardware. To quote then CEO, Melinda Smith, “We didn’t know a
lot about this business when we set the budget”. Despite the fact it took Bunnings over a century
993
654 to achieve 17% market share, Management continues to defend its overly optimistic growth
174 183 222 320
forecasts. Moreover, a failure to grasp seasonality of Australian hardware has led to poor inventory
FY09 FY10 FY11 FY12 FY13 FY14 turnover, with inventory days increasing to 38.3 days in FY14, up from 31.0 in FY10. Most crucially,
Bunnings WOW Masters has a mediocre customer value proposition, with “bright lights” and “air conditioning”
Source: IBISWorld Industry cited as key differentiators to Bunnings. These factors have failed to attract tradespeople, who
Report G4231
continue to return to the “rougher” Bunnings. The result of this is that Masters has 49 loss making
WOW Online Sales $m AUD
stores with no new break even guidance. We forecast Masters will incur further losses as
1074.3 Management invests in a save‐face operation, indicative of a failure to create new growth.
Online Sales ‐ Bricks vs. Clicks
600.4 Few sequels are as good as the original, and Managements second Project Mercury is particularly
uninspiring. While online retailing is a notable market trend, online sales comprise 2% of WOW’s
307.9
188.9
F&L sales. We believe the headline focus of Mercury Two on “click and collect” functionality misses
118.8
the core driver of Woolworths’ performance during the 2000s, which was inventory turnover.
FY10 FY11 FY12 FY13 FY14 PRICE CATALYSTS: The market has not priced the implications of a failure to create growth in a
Source: Company Reports
mature firm: when Masters missed guidance (12/08/14), WOW moved only ‐45bps. Further losses
will emphasise Woolworths’ decline. Lowe’s put option may also materially affect WOW cash flow.
SUPPLY CHAIN DECAY | THE END OF THE VIRTUOUS LOOP?
Total Area and Return on The benefits of Project Refresh have eroded, with inventory turning only 10 times in FY14, a level
Funds Employed not seen since FY03. WOW’s historic success has been driven by a virtuous cycle of volume‐driven
2,600 32% productivity gains. Under this business model, WOW achieves volume growth through driving
Area sqm '000
2,500 31% down costs and investing savings in lower prices for customers. A key driver of this “double loop”,
2,400 30% however, is the relationship between WOW’s sales and inventories. As inventory turns faster than
2,300
29% payables, Management can draw upon interest free leverage to invest in cost efficiencies. Thus,
28% declining inventory and an upward trend in cost of doing business since FY10 has limited the double
2,200
27% loop, restricting scope for investment, price drops and volume growth. In addition, slower
2,100 26%
2,000
inventory turnover negatively impacts the freshness of WOW’s produce, further eroding market
25%
share. Thus, we forecast cost improvements to have peaked, with margins contracting, and supply
1,900 24%
FY10 FY11 FY12 FY13 FY14
chain inefficiencies to extend.
Total Area (LHS)
ROFE (RHS) PRICE CATALYSTS: We perceive market expectations of Mercury Two as replicating Project Refresh,
however FY15 updates of stagnant inventory turns will reverse consensus on the reform.
Source: Company Reports
5
VALUATION
Method Value Weight The target share price target of $29.27 has been derived by triangulating the results of two separate
DCF Price $29.23 80% valuation methods; a discounted cash flow analysis (DCF) and multiples analysis. The methods
Multiples $29.45 20% were weighted at 80% and 20% respectively, which we justify as the DCF allows explicit modelling
Triangulation $29.27 of segmental performance.
DISCOUNTED CASH FLOW | METHODOLOGY
WACC Derivation Our DCF analysis produced an intrinsic value per share of $29.23. In deriving this valuation, revenue
WACC (Explicit) 8.63% has been modelled on a segmented basis. As detailed divisional financials are not provided by
WACC (Terminal) 8.63% Management, a sum‐of‐the‐parts DCF has not been utilised. Instead, a two‐stage growth model
Terminal Growth 2.82% has been applied in which performance is forecasted year‐on‐year up to 2021, after which we
PV Forecast FCFFs $ 12,582 assume revenues will grow at a constant terminal rate. Despite operating in a mature industry, a
PV Terminal Value $ 27,333
relatively long explicit forecast horizon was applied, such that the effects of the Masters roll‐out
Enterprise Value $ 39,915
and changes in industry structure could be adequately imputed into the model. After consolidating
Add: Cash $ 923
Less: Debt ‐$ 4,356
segment performance at the revenue line, remaining line items were modelled as a consolidated
Equity Value $ 36,482
entity. Free cash flows to firm are then calculated, discounted at WACC, with outside equity
Shares Outstanding (m) 1,248 holdings and debt liabilities netted out. Key assumptions are detailed below, and in Appendix 10.
Value per Share $ 29.23
Revenue Assumptions
Food and Liquor revenue is derived as a function of store rollouts, average store size, and average
F&L Revenue Forecast sales per m2. Through FY10‐FY14, WOW rolled‐out an average of 30 supermarkets p.a. in Australia
6
Millions
and New Zealand. Per Management’s guidance, we have modelled a reduced opening rate of 16‐
60
5
5 5
50
5 5 17 stores p.a. With respect to store size, Management has indicated that supermarket floor space
4 5
40
will increase to accommodate specialist offerings (sushi bars etc.). As such, we expect average store
30 size to grow by 3% in FY15 (in line with Management guidance) before falling to 0.9% in FY21 as
50 53
40 41 44 45 47 this strategy is implemented. Finally, growth in sales per m2, has been modelled per:
38
20
10
1 1 . Population
growth, as a proxy for market size, is expected to grow at 1.03% throughout FY14‐21. As we are of
the view that prices will remain sluggish over the medium‐long term, food inflation is forecasted
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY19E
FY21E
to range from ‐0.1% in FY15 to 1.9% in FY21, slightly below the RBA’s target CPI rate of 2‐3%. Finally,
Aus Sales NZ Sales we take a negative view on WOW’s market share in light of the continued expansion of low‐cost
Source: Company Reports, SURG Estimates competitors ALDI and Costco and the continued threat of its revitalised rival, Coles. However, we
also believe that a lack of available space due to the reluctance of Local and State Governments to
Fuel Price and Volume Forecast change zoning laws will limit ALDI’s ability to adopt its ‘small‐format store’ strategy. As such,
20 market share is expected to fall gradually from 39.60% in FY14 to 35.50% in FY21. This generates
Thousands
1.7
total F&L revenue growth of 4.8% in FY14, declining to 2.6% in FY21.
15 1.6
10 1.5
Fuel performance is derived through a top‐down approach, whereby WOW is forecasted to
perform in line with overall industry trends. Revenue is therefore modelled as a function of key
5 1.4 macro drivers (Australian retail fuel consumption, average national retail fuel prices) and
1.3
Woolworths’ competitive position within the Australian fuel retailing market (market share). From
FY12‐FY14, Australian petrol sales declined on average 1.8% p.a. We forecast stabilisation to 1%
p.a. growth by FY21, with diesel rising 2% p.a. due to increasing demand for fuel efficient vehicles.
Petrol Sales Volume (LHS)
Retail Diesel Sales Volume (LHS) Average national prices are forecast to long term trend, according to Australian Institute of
Petrol Price (RHS)
Diesel Price (RHS)
Petroleum figures. Woolworths’ fuel retailing share is assumed relatively constant, declining 0.9%
*Source: Company Reports, SURG Estimates over the horizon due to ACCC protection of independent retailers. This supports a forecast of 4.4%
fuel revenue growth FY14, tapering to 2.2% FY21.
General Merchandise Forecast
1,120 4,300 General Merchandise is modelled as a function of sales per m2. The general merchandise segment
Thousands
is forecasted to drop by 0.94% in FY16 as Big W continues to struggle generating meaningful
1,080 4,200
growth. However, it is expected that growth in general merchandise will improve over FY17‐21
1,040 4,100 following the store transformation, with revenue growing between 1.04% and 1.83% p.a.
1,000 4,000 Hotel revenues were estimated by forecasting two metrics; the number of Hotels (including clubs)
and a growth rate for Sales per hotel. As new store additions for the ALH group have historically
960 3,900
been in the low digits, we have assumed that hotels will increase by 3 and 2 new properties in FY15
and FY16 respectively, growing at 1 hotel p.a. thereafter. Growth in sales per hotel is indexed to
Total Area (LHS) population growth, growth in discretionary income, and social attitudes towards alcohol and
Sales per sqm (RHS)
*Source: Company Reports, SURG Estimates
gambling.
6
Hotels Growth Rate
In light of declining alcohol per capita consumption and increasing regulatory restrictions on both
alcohol and gambling, we expect consumer sentiment to decline over time. This decrease,
Population
Growth
however, is counteracted by growth in population growth and growth in disposable income.
Accumulatively, we expect Revenue to grow at an average of 3.6% p.a. in FY15‐21.
Growth in
Discretionary
Income Home Improvement revenue is split between Home Timber & Hardware (formerly Danks) and
Alcohol &
Masters. Masters is assumed to roll out 15 stores in FY15, tapering to 3 by FY21. Our long term
Gambling
Consumption
forecast for sales per store growth is 4%. While we do not expect Masters to be a material profit
contributor, we accept Management’s assertion that the business will eventually break even. We
Sales per forecast total home improvement revenue growth of 18.5% FY15, tapering to 6.1% FY21.
Hotel Growth
Pro Forma Assumptions
Group statements are forecast upon consolidation. EBITDA Margins plateau at 7.7% in FY15 before
WACC Derivation
declining to 6.5% by FY21. This reflects an increased OPEX ratio from 72.9% in FY15 to 73.6% in
Method Value
FY21 as discussed in our financial analysis. Depreciation and amortisation rates were held constant
Spot Yield (10Y AU Gov Bond) 3.75%
at their historical rates of 8.9% and 2.4% respectively. Taxation was set at the Australian statutory
5 Year Average 4.81%
Risk Free Rate 4.59%
rate of 30%. No significant corporate financing changes are forecast with the payout ratio
Beta 0.80 remaining between 68%‐70%. Group CAPEX is modelled on segmental CAPEX forecasts,
Equity Risk Premium Australia 6.38% comprising maintenance CAPEX (set to depreciation) plus growth CAPEX to account for increased
CAPM Cost of Equity 9.7% store openings and investments in supply chain reform. Average CAPEX per store opening is kept
WOWAU 03/21/19 Spread 0.34% at historical levels of $14m. After integrating a front loaded investment attributable to Mercury
Credit Rating A‐ Two supply chain reforms, which totals $1bn over 5 years, FY15 forecasts of CAPEX total $2,413m.
Tax Rate 30% Working Capital remains negative at ‐$1,255m, highlighting the generation of cash flow as
After Tax Cost of Debt 3.53% inventory turns faster than payables as discussed in our financial analysis.
WACC 8.63%
DCF: FCFF Growth
Free Cash Flows to Firm stabilise to a sustainable 3% growth at the end of the forecast horizon and
are calculated by adjusting after‐tax EBIT for cash and non‐cash charges. After adding the value
35%
of imputation credits for Australian investors (worth on average $565m p.a.) FCFF is derived for
25% FY15 to be $2,090m, increasing to $2,757m by FY21. WACC is used to discount FCFF’s as a whole
firm measure of capital cost and is derived on the left (with further detail in appendix 12). As per
15%
our financial analysis, capital structure is held constant.
5%
Undiscounted terminal value as at FY21 is estimated as $47,591m which represents an effective
‐5% multiple of 17x FY21 FCFF. The terminal WACC is held at 8.6%, with Terminal Growth of 2.8%
triangulated between (1) long‐term Australian GDP at 2.75%, (2) RBA inflation expectation 2.4%
p.a., (3) population growth of 1.03% and (4) growth rate in F&L industry turnover of 4.1%. Net
debt is subtracted from discounted cash flows to provide an equity value which is then divided by
shares outstanding to provide an intrinsic valuation per share of $29.23.
*Source: Company Reports, SURG Estimates
Monte Carlo Simulation
Sensitivity Analysis
To analyse the robustness of our analysis, we performed a series of sensitivity analyses on WACC
and terminal growth rate, as well as macroeconomic and industry factors (see Appendix 16).
However, as sensitivity analyses are not probability weighted, we complemented this study with a
Monte Carlo simulation. In examining changes in Operating Margins and F&L Market share
assumptions within 10,000 trials, the resulting distribution provides a share price range of $28.45
‐ $30.00 with 90% confidence.
MULTIPLES ANALYSIS | METHODOLOGY
Multiples Analysis In addition to our DCF valuation, we conducted a multiples analysis on the consolidated operations
Method Avg. Value
of WOW. Specifically, we have utilised a weighted average peer index comprised of one‐year
EV/EBITDA $23.99 60%
forward estimates of P/E, EV/Sales and EV/EBITDA. Five companies have been utilised to infer the
EV/Revenue $29.43 10% market value of WOW; Wesfarmers, Metcash, Tesco, Sainsbury, and Carrefour. These firms were
P/E $31.32 30% selected as they exhibit similar financial and business profiles to WOW. As Wesfarmers is WOW’s
Price 29.45 100% largest Australian competitor, we applied a weighting of 40%, with other comparables receiving
*Source: Bloomberg 15%.
7Historic Multiples The P/E multiple was chosen as it is a widely observed measure of equity in all markets. The
30 1.0
weighted average FY15e P/E of our comparables implies a base‐case valuation of $31.32 for WOW.
25 0.8 WOW currently trades at a one year forward P/E of 17.3x, a ~15% premium to the market P/E of
20
0.6 15x and a ~4% premium to the 16.6x peer group median. EV/EBITDA was selected as it is largely
15 unaffected by changes in capital structure, while EV/Sales has the advantage of being the least
0.4
10 susceptible to differences in accounting policies. As WOW trades above the weighted average of
5 0.2 both EV/EBITDA ($29.4) and EV/Sales ($24.0) multiples, the firm appears to be overvalued on a
0 0.0
relative basis. In weighting the multiples, outlined in appendix 17, we derive a base case price of
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 $29.45, with higher weighting toward EV/EBITDA to account for cost structure.
EV/EBITDA (LHS) EV/EPS (LHS)
EV/Sales (RHS) FINANCIAL ANALYSIS
PROFITABILITY
Total Area & Sales per square metre
Stalling Food and Liquor Sales Productivity
3.5 17.0
Woolworth’s sales productivity – measured as average sales per m2 ‐ increased from $11,811 p/m2
Millions
Thousands
3.0 in 1999 to a peak of $16,172 p/m2 in 2011. This 37% increase in productivity was primarily driven
16.5
2.5 by supply chain reforms achieved through Project Refresh. However, stagnation has occurred since
2.0 FY11, with sales p/m2 falling to $16,021 in FY14 (‐5.75%).
16.0
1.5
1.0
We attribute this fall in productivity to (1) aggressive price competition and (2) store roll outs aimed
15.5
at precipitating market saturation. First, price competition from ALDI and Coles has driven food
0.5
prices into real deflation, with prices increasing by an average of 0.5% p.a. from FY09‐14. Our
0.0 15.0
forecasts reflect this ongoing price pressure, incorporating an average 0.9% p.a. food inflation from
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY19E
FY21E
FY15‐21. Second, aggressive supermarket roll outs of 30 per annum cannibalise sales, with 60%
Total Area (sqm) (LHS) opened in postcodes with existing Woolworths’ stores. As Woolworths’ erodes competition by
Sales per sqm (RHS) consciously saturating markets with stores, the firm’s normalised return on funds employed has
*Source: Bloomberg, SURG Estimates been eroded from 31% in FY10 to 27% FY14.
Our forecast continues sluggish sales p/m2 growth, ranging between ‐0.1% to 0.9% p.a. FY15‐FY21.
EBITDA Margin
10% Margins Under Pressure
Millions
75
Woolworths’ gross profit margins increased from 25.7% in FY09 to 27.11% in FY14, with EBIT
60 8% margins up to 6.21% in FY14. This improvement was drawn from leveraging market power over
45 suppliers, and rolling out private label products, which reached 15% of total sales in FY14.
5%
30
3% However, as revenue growth is slowing at a time of increasing costs, we forecast gross margins to
15
tighten. Revenue growth is stunted by sluggish price inflation, and slowing inventory turns.
‐ 0%
Additionally, premium services (barista coffee, sushi bars) will increase COGS, requiring specialist
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY19E
FY21E
staff and produce. As such, gross profit margins tighten in our forecast to 26.4% by FY21, and EBIT
Sales (LHS) margins to 4.56% in FY21. EBIT margin contraction is amplified by rent expense. However, we do
COGS, SG&A, Rent (LHS) forecast some SG&A efficiencies with automation from Mercury Two declining from 16.1% in FY14
EBITDA MARGIN (RHS) to 15.97% F21.
*Source: Bloomberg, SURG Estimates
FINANCING
Increasing Effective Gearing
Cost Composition
Woolworths’ interest expenses declined 12% in FY14, as proceeds from property sales were
directed towards US bond redemptions in FY13. FY14 EBIT interest coverage is a strong 10.7x,
however this metric is deceiving as effective gearing rises once Woolworths’ property policy is
taken into account. By selling off property, and re‐deploying the capital into the firm, the firm is
geared with long term rental liabilities. EBITDAR coverage of interest in FY14 was 25.6x, however
only 3.1x accounting for all interest charges and rent.
In FY14, minimum rental payments were $1.9bn, 28.5% of EBITDAR. During FY14, Woolworths’
rental burden substantially increased with the sale of the ALH Hotels property portfolio,
contributing a further forecasted $30.8m in rent in FY15. We forecast rental expense to increase
with store roll outs, and growth in rental yields, up to 38.6% of EBITDAR in FY21. This results in
*Source: Bloomberg, SURG Estimates
EBITDAR Margins declining from 11% in FY15 to 10.4% in FY21. On a coverage basis, we forecast
EBITDAR coverage of rent and interest charges to fall to 2.5x in F21, from 3.1x in FY14.
8Reliable Capital on Tap
From FY09‐FY14, group CAPEX averaged $2,174m per annum, with our forecasts following
Management guidance of store roll outs and refurbishments to require $2,645m in FY15, tapering
to $1,690m in FY21. This CAPEX has been supported by WOW’s reliable sources of capital – (1)
dividend reinvestment, (2) negative working capital and (3) cheap corporate debt issuance.
First, Woolworths’ dividend reinvestment plan has on average 15% take‐up, with reinvested
dividends forecast to be worth $265m in FY15. We have assumed a constant payout of 69% NPAT,
with continuing 15% reinvestment. Second, Woolworths generates negative working capital by
selling substantial produce before paying suppliers. This provides flexible ongoing liquidity to
deploy into CAPEX projects, discussed under ‘enhanced cash generation’.
Third, Woolworths’ has maintained an A‐ (S&P) credit rating, enabling access to cheap credit.
Woolworths’ Debt/ Equity ratio has historically remained stable, being ~7.8% in FY14. We use 7.8%
as a target debt to equity ratio, without any indication of Management intentions to become more
heavily reliant on debt funding. Further, in support of good capital Management, and in line with
Australian practices, excess cash will likely be committed to a projected share buy back in FY19 of
$1,729m.
OPERATIONS
Negative Working Capital: Enhanced Cash Generation
A scaled grocery retailer, Woolworths generates negative working capital. Rather than investing
capital to grow, Woolworths’ operations draw in cash flow with growth as customers pay
WOW Inventory & Payables
immediately for produce Woolworths will pay for in the future. This provides Woolworths with
9,000 highly flexible liquidity. First expressed through day turns, in FY14, Days Sales Outstanding was
8,000 5.56 from the balance sheet, far lower than Day Payables Outstanding at 49.5. We forecast Days
7,000 Payable to remain at 49, with no further changes to supplier terms, and receivables to remain at
6,000
5,000
an historical average of 6.5, with no major changes to consumer credit policy.
4,000
3,000 The negative working capital effect is further seen in the gap between inventory and payables on
2,000 the balance sheet. At the end of FY14, Woolworths had $4.69bn in inventory on hand, and
1,000
0
payables of $6bn. This implies suppliers have effectively loaned $1.3bn interest free to Woolworths
as the produce has been sold and not paid for. We forecast this gap to continue, shown left, with
inventory growing with the firm to $6.4bn in FY21, maintaining the effect of negative working
Inventories A/C Payable capital with payables $7.5 bn. Further, the current ratio has been historically below 1, at 0.95 in
*Source: Company Reports, SURG FY14.
Estimates
Slowing Inventory Turns: Freshness of Produce
In FY14, inventory turned over 10x, which represents substantial slow down since FY05, where
Inventory Turns inventory turned 14 times. Similarly, normalised day sales inventory in FY14, measured on a rolling
14 average basis, was 34.1, up from 31 in FY10. The rolling average inventory metric most accurately
12 reflects sales activity, rather than a static balance sheet measure. Critically, slower inventory
10 turnover indicates produce in transit, or on shelves for longer. This reduces freshness and quality
of produce received by customers, which can result in a perpetual cycle by lowering sales volume
8
and again slowing inventory turnover. We have forecast day sales of inventory to increase over
6
the forecast horizon, reflecting increased competition and declining volumes, from 28.2 in FY14,
4 to 30.5 by FY17, based on a static balance sheet measure of inventory. The slowing inventory
2 turnover will also diminish cash flows created from negative working capital.
0
Yield Chase
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Woolworths’ FY14 dividend yield was 3.9%, an attractive return for investors in a low interest rate
*Source: Company Reports environment. Australia's official cash rate in FY14 remained at a record low of 2.5%, with
depository interest margins compressed. This has triggered a thematic “yield play” in Australian
equity markets, as self‐managed superannuation funds seek reliable yield above the current
depository rates.
However, we believe this factor will recede over the next 12‐24 months as interest rates rise in
Australia and globally. Further, Woolworths’ ability to sustain a high dividend yield will be
threatened by dropping NPAT from compressed operating margins. We further note that
Woolworths’ dividend reinvestment plan provides ongoing minor dilution year on year, which will
taper dividend yield over time.
9INVESTMENT RISKS
Downside Risks DOWNSIDE RISKS
Economic | Further slowdown in the rate of consumer spending and consumption (E1)
Australian real wages fell 0.3% in FY14 and unemployment is at a 12 year high (6.1%). Australian
I(1) I)
High
retailers are therefore competing for shrinking disposable incomes. Any economic slowdown or
Significance of Risk
decline in house prices will affect fragile consumer confidence, driving demand for discount and
R) I(2) E(2)
private label products. Moreover, with car ownership in Australia at nearly 88%, consumers are
Medium
E1) E(1) R(1) (4)
willing to travel to discount retailers. As Costco and ALDI both have lower cost bases, and superior
value perception, an economic slowdown will disproportionately favour these staple providers.
O(1)
O(1) E(4) Economic | Food Deflation Continues (E2)
Low
Real price deflation may accelerate in the event that ALDI adopts an aggressive store roll‐out
I1) E(3) strategy or if Coles implements further price reductions. Importantly, broad price reductions will
Low Medium High disproportionately affect WOW’s high‐margin products. As WOW exhibits market leading gross
Probability of Risk profit margins, this poses a significant risk to both its profitability and valuation.
Economic Risk | NZD Currency Risk (E3)
Strong movements in the AUD/NZD rate will affect the profitability of WOW’s New Zealand
operations. While WOW hedges NZD sourced revenue to reduce currency risk, an unforseen
appreciation of the AUD relative to NZD will decrease revenue attributable to equity holders.
However, the AUD/NZD rate is traditionally stable, trading within a range of $1.08‐$1.37 from
2010‐2013 with a standard deviation of 6 cents. We therefore do not believe this represents a
material risk.
Regulatory | Increased Regulatory Scrutiny (R1)
The Australian Supermarket and Grocery industry has been subject to increasing political and
regulatory scrutiny. In February 2014, the ACCC instituted Federal Court proceedings against WOW
for allegedly breaching fuel shopper docket undertakings. Additionally, in FY13‐14 the ACCC
continued investigation into misuse of market power by Coles and Woolworths. These
investigations provide a distraction for management, and can force changes to operations. In
contrast, the ACCC has welcomed ALDI’s competitive tension. Any adverse ACCC action will detract
from public perception of Woolworths. Similarly, changes to gaming machine legislation, such as
pre‐commitment, and taxation will materially impact ALH division profitability.
Industry | Adverse Weather Events (I1)
Australia is the world’s 51st largest country by population and 6th largest by area. As WOW sources
90% of produce domestically, the business’ supply chain is exposed to adverse weather events.
Although the probability of events such as droughts and floods are low, these can significantly
impact WOW’s operations and inventory management as well as lead to product write downs.
UPSIDE RISKS
Industry | No Land to Grab (I2)
The lack of available space for store openings is a key restraint to the expansion of alternative low‐
cost retailers. We view this factor as the single most significant constraint on ALDI’s ability to adopt
its ‘small‐format store’ strategy. Similarly, Costco’s expansion is restricted by a lack of suitable sites
for its warehouse store format. As such, if these issues persist, our forecasted decline in WOW’s
market share may be significantly smaller than expected.
Operational Risk | Masters Breakeven Before Expectation (O1)
Masters achieving break‐even prior to market expectation can provide upside potential for
Woolworths. A successful execution of Masters will restore market confidence in management’s
ability to generate new growth for the firm. Further, capital will be freed for alternative growth
ventures.
Economic Risk | Chasing Yield (E4)
Lastly, investors have historically been attracted to WOW’s consistent dividend yield. As such we
recognise that defensive investors may ignore WOW’s underlying risks in favour of a stable income
stream. This may provide material support to the current share price.
10APPENDIX 1: STATEMENT OF FINANCIAL POSITION
In AUD Millions FY13 FY14 FY15F FY16F FY17F FY18F FY19F FY20F FY21F
Cash and cash equivalents 849 923 702 756 930 1,438 942 967 1,680
Trade and other receivables 969 926 1,131 1,166 1,203 1,242 1,284 1,318 1,354
Inventories 4,205 4,693 5,068 5,407 5,673 5,855 6,056 6,213 6,382
Other financial assets 54 13 68 62 57 46 50 49 55
Assets held for Sale 149 621 168 ‐ ‐ ‐ ‐ ‐ ‐
Total Current Assets 6,226 7,175 7,136 7,391 7,863 8,581 8,332 8,547 9,471
Trade and other receivables 17 108 39 21 21 22 23 23 24
Other financial assets 360 305 332 318 325 322 324 323 323
Property, plant and equipment 9,246 9,601 11,167 12,204 12,941 13,609 14,134 14,602 15,010
Intangible assets 5,784 6,335 6,177 6,030 5,886 5,746 5,609 5,475 5,344
Deferred tax assets 618 682 677 649 629 615 606 605 616
Total Non‐Current assets 16,025 17,030 18,392 19,222 19,802 20,313 20,694 21,028 21,318
ASSETS 22,251 24,205 25,528 26,613 27,666 28,895 29,027 29,575 30,788
Accounts Payable 5,390 6,006 6,244 6,458 6,683 6,916 7,163 7,349 7,549
Borrowings 169 220 220 220 220 220 220 220 220
Current tax liabilities 193 159 233 223 216 212 208 208 212
Other financial liabilities 146 168 168 168 168 168 168 168 168
Provisions 967 1,005 1,045 1,086 1,129 1,173 1,220 1,268 1,318
Total Current Liabilities 6,866 7,558 7,909 8,155 8,416 8,689 8,979 9,213 9,466
Borrowings 4,283 4,136 4,048 3,874 3,684 3,684 4,312 3,684 3,684
Other financial liabilities 993 1,155 1,155 1,155 1,155 1,155 1,155 1,155 1,155
Provisions 550 567 586 605 624 645 665 687 709
Other 259 263 263 263 263 263 263 263 263
Total Non‐Current Liabilities 6,084 6,122 6,052 5,897 5,726 5,747 6,396 5,789 5,811
LIABILITIES 12,950 13,680 13,961 14,052 14,142 14,435 15,374 15,002 15,278
Issued capital 4,523 4,850 5,115 5,371 5,618 5,861 4,371 4,609 4,853
Shares held in trust (181) (219) (219) (219) (219) (219) (219) (219) (219)
Reserves 25 198 198 198 198 198 198 198 198
Retained earnings 4,661 5,423 6,199 6,938 7,653 8,347 9,030 9,712 10,406
Equity Attributable to Shareholders 9,028 10,253 11,294 12,288 13,251 14,187 13,380 14,301 15,238
Non‐controlling interests 272 273 273 273 273 273 273 273 273
Total Equity 9,301 10,525 11,567 12,561 13,523 14,460 13,653 14,573 15,511
11APPENDIX 2: STATEMENT OF COMPREHENSIVE INCOME
In AUD Millions FY13 FY14 FY15F FY16F FY17F FY18F FY19F FY20F FY21F
Food and Liquor (Australia) 40,031 41,171 43,889 45,485 47,032 48,510 50,211 51,401 52,722
Food and Liquor (New Zealand) 4,600 5,186 4,711 4,892 5,059 5,244 5,407 5,544 5,685
Fuel 6,794 7,065 7,467 7,430 7,483 7,649 7,846 8,084 8,341
General Merchandise (Big W) 4,383 4,352 4,392 4,350 4,395 4,454 4,523 4,596 4,680
Hotels (ALH) 1,469 1,472 1,517 1,573 1,639 1,710 1,792 1,850 1,891
Home Improvement (Danks) 710 775 813 853 894 936 978 1,022 1,067
Home Improvement (Masters) 529 752 997 1,197 1,388 1,564 1,716 1,859 1,991
Sales 58,516 60,773 63,786 65,780 67,891 70,067 72,472 74,356 76,378
COGS (42,755) (44,295) (46,493) (48,085) (49,764) (51,499) (53,339) (54,726) (56,214)
Gross Profit 15,762 16,478 17,292 17,695 18,127 18,568 19,133 19,630 20,164
SG&A (9,379) (9,807) (10,269) (10,571) (10,897) (11,225) (11,596) (11,890) (12,198)
EBITDAR 6,383 6,670 7,023 7,124 7,230 7,343 7,537 7,740 7,966
Rent (1,764) (1,899) (2,076) (2,231) (2,389) (2,554) (2,722) (2,894) (3,074)
EBITDA 4,619 4,772 4,946 4,893 4,841 4,790 4,815 4,847 4,893
Depreciation (810) (816) (899) (1,012) (1,089) (1,150) (1,201) (1,244) (1,282)
Amortisation (155) (180) (158) (147) (144) (140) (137) (134) (131)
EBIT 3,653 3,776 3,889 3,734 3,609 3,500 3,477 3,469 3,480
Net Financing Cost (251) (219) (204) (201) (190) (157) (189) (187) (142)
Woolworths Notes interest (46) (41) (50) (46) (43) (40) (37) (33) (30)
Profit Before tax & significant items 3,356 3,515 3,636 3,487 3,376 3,303 3,252 3,248 3,308
Tax (997) (1,057) (1,091) (1,046) (1,013) (991) (975) (974) (992)
NPAT 2,359 2,459 2,545 2,441 2,363 2,312 2,276 2,274 2,316
Shares Outstanding at Period End (m) 1,237.4 1,248 1,256 1,263 1,270 1,277 1,234 1,241 1,248
Total Dividend/Share (Cents) 133.0 137 141 135 130 127 129 128 130
Total Dividend Paid (m) 1,645.7 1,710 1,769 1,702 1,648 1,618 1,593 1,592 1,621
Retained Earnings 713.4 749 776 739 715 694 683 682 695
Imputation credits (Fully Franked) 695.2 735 606 584 565 555 546 546 556
APPENDIX 3: STATEMENT OF CASH FLOWS
In AUD Millions FY13 FY14 FY15F FY16F FY17F FY18F FY19F FY20F FY21F
EBITDA 4,619 4,772 4,946 4,893 4,841 4,790 4,815 4,847 4,893
Financing Expense (298) (260) (254) (247) (233) (197) (225) (221) (172)
Tax Paid (997) (1,057) (1,091) (1,046) (1,013) (991) (975) (974) (992)
Change in Working Capital (601) 176 (355) (123) (81) 26 (3) (4) (12)
Net Cash Flows from Operating Activities 2,724 3,631 3,247 3,478 3,515 3,628 3,612 3,648 3,716
Total Capex (1,955) (1,899) (2,465) (2,049) (1,826) (1,818) (1,726) (1,712) (1,690)
Proceeds from Asset Sale ‐ ‐ 452 ‐ ‐ ‐ ‐ ‐ ‐
Net Cash Flows From Investing Activities (1,955) (1,899) (2,013) (2,049) (1,826) (1,818) (1,726) (1,712) (1,690)
Change in Existing Debt (295) (96) (495) (42) (42) (42) (42) (42) (42)
Financing Repayment/Addition 1,002 (180) 544 115 (72) 116 744 (516) 107
Distributions Paid (1,646) (1,710) (1,769) (1,702) (1,648) (1,618) (1,593) (1,592) (1,621)
Change in Equity 186 327 265 255 247 243 (1,490) 239 243
Net Cash Flows from Financing Activities (752) (1,659) (1,455) (1,374) (1,515) (1,302) (2,381) (1,911) (1,313)
Net increase in cash 16 73 (221) 55 174 508 (496) 24 713
Opening Cash 833 849 923 702 756 930 1,438 942 967
Net Change in Cash 16 73 (221) 55 174 508 (496) 24 713
Closing Cash 849 923 702 756 930 1,438 942 967 1,680
12APPENDIX 4: COMMON-SIZE STATEMENT OF FINANCIAL POSITION
% of Assets FY13 FY14 FY15F FY16F FY17F FY18F FY19F FY20F FY21F
Cash and cash equivalents 3.82% 3.81% 2.75% 2.84% 3.36% 4.98% 3.25% 3.27% 5.46%
Trade and other receivables 4.35% 3.82% 4.43% 4.38% 4.35% 4.30% 4.43% 4.46% 4.40%
Inventories 18.90% 19.39% 19.85% 20.32% 20.51% 20.26% 20.86% 21.01% 20.73%
Other financial assets 0.24% 0.05% 0.27% 0.23% 0.21% 0.16% 0.17% 0.17% 0.18%
Assets held for Sale 0.67% 2.56% 0.66% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Total Current Assets 27.98% 29.64% 27.95% 27.77% 28.42% 29.70% 28.71% 28.90% 30.76%
Trade and other receivables 0.07% 0.45% 0.15% 0.08% 0.08% 0.08% 0.08% 0.08% 0.08%
Other financial assets 1.62% 1.26% 1.30% 1.20% 1.18% 1.11% 1.11% 1.09% 1.05%
Property, plant and equipment 41.55% 39.66% 43.74% 45.86% 46.78% 47.10% 48.69% 49.37% 48.75%
Intangible assets 26.00% 26.17% 24.20% 22.66% 21.28% 19.88% 19.32% 18.51% 17.36%
Deferred tax assets 2.78% 2.82% 2.65% 2.44% 2.27% 2.13% 2.09% 2.05% 2.00%
Total Non‐Current assets 72.02% 70.36% 72.05% 72.23% 71.58% 70.30% 71.29% 71.10% 69.24%
ASSETS 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Accounts Payable 24.22% 24.81% 24.46% 24.26% 24.16% 23.94% 24.68% 24.85% 24.52%
Borrowings 0.76% 0.91% 0.86% 0.82% 0.79% 0.76% 0.76% 0.74% 0.71%
Current tax liabilities 0.87% 0.66% 0.91% 0.84% 0.78% 0.73% 0.72% 0.70% 0.69%
Other financial liabilities 0.66% 0.69% 0.66% 0.63% 0.61% 0.58% 0.58% 0.57% 0.55%
Provisions 4.35% 4.15% 4.09% 4.08% 4.08% 4.06% 4.20% 4.29% 4.28%
Total Current Liabilities 30.86% 31.23% 30.98% 30.64% 30.42% 30.07% 30.93% 31.15% 30.75%
Borrowings 19.25% 17.09% 15.86% 14.56% 13.32% 12.75% 14.86% 12.46% 11.96%
Other financial liabilities 4.46% 4.77% 4.53% 4.34% 4.18% 4.00% 3.98% 3.91% 3.75%
Provisions 2.47% 2.34% 2.29% 2.27% 2.26% 2.23% 2.29% 2.32% 2.30%
Other 1.17% 1.09% 1.03% 0.99% 0.95% 0.91% 0.91% 0.89% 0.85%
Total Non‐Current Liabilities 27.34% 25.29% 23.71% 22.16% 20.70% 19.89% 22.03% 19.57% 18.87%
LIABILITIES 58.20% 56.52% 54.69% 52.80% 51.12% 49.96% 52.97% 50.72% 49.62%
Issued capital 20.33% 20.04% 20.04% 20.18% 20.31% 20.28% 15.06% 15.59% 15.76%
Shares held in trust ‐0.81% ‐0.90% ‐0.86% ‐0.82% ‐0.79% ‐0.76% ‐0.75% ‐0.74% ‐0.71%
Reserves 0.11% 0.82% 0.78% 0.74% 0.72% 0.69% 0.68% 0.67% 0.64%
Retained earnings 20.95% 22.40% 24.28% 26.07% 27.66% 28.89% 31.11% 32.84% 33.80%
Equity Attributable to Shareholders 40.57% 42.36% 44.24% 46.17% 47.90% 49.10% 46.09% 48.35% 49.49%
Non‐controlling interests 1.22% 1.13% 1.07% 1.03% 0.99% 0.94% 0.94% 0.92% 0.89%
Total Equity 41.80% 43.48% 45.31% 47.20% 48.88% 50.04% 47.03% 49.28% 50.38%
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