Woolworths is the largest retailer in Australia that operates several supermarkets in Australia together with Wesfarmers owned Coles. According to Westbrook, (2014 p.30), it mainly operates in hotels, Dan Murphy and BWS liquor chains. Recently, Woolworths launched a home improvement brand referred to as Masters that competes with Bunnings a highly successful brand of Wesfarmers.
Wesfarmers’ earnings in the resource exposed divisions often bounce around and sometimes the group can gain significantly higher contributions at the interim result. The retail business of the group contributes about 80% of the total divisional earnings before interest and earnings. The major difference between Wesfarmers and Woolworth is that Wesfarmers gets most of its earnings from its Bunnings franchise and its Coles’ supermarket division while the earnings of Woolworths are only from its supermarket division.
By the end of 2012 financial year, all the Wesfarmers divisions achieved significant improvements in its underlying performance and for the first time profits exceeded $2 billion. Wesfarmers Home Improvement division that incorporates Bunnings reported operating revenue of $58,080million that represented a 5.8% increase in revenue. On the hand, the earnings before interest and tax (EBIT) increased to $3,549million which was a 9.8% increase while net profit increased by 10.6% to $2,126 million (Anonymous 2012 p.100).
These earnings were maintained through focusing on the promotion’s profitability and lower levels of clearance. Insurance earnings of $5 million the reserve estimates for February 2011 Christchurch earthquake were increased by $108 million. Excluding this event, the earnings were more than the previous year since claim expenses in underwriting had reduced. On the other hand, resource’s earnings increased to $439 million representing a 19% increase. The increase was due to the high export coal prices which later increased the volume of sales after the completion of expansion projects in Bengalla and Curragh mines.
Chemical, fertilizers and energy reported an earning of $258 million, mainly because of the higher pricing and good production performances in the business of chemicals and increase in the sales of fertilizer. The industrial and safety reported a good performance with the earning increasing to $190 million; this was a 14.5% increase. The increase was attributed to strong demand from sectors of engineering and resources and enhanced competitive position.
Currently, Bunning has about 318 stores which comprise of 218 warehouse format stores, 35 trade centre stores and 65 smaller format stores. The company recently opened five new stores and 15 more are under construction (Roth, 2013 p.102).
The sales revenue reported by the Woolworths Home Improvement division was of $ 55,268.7 million which represented an increase of 4.7% and profit before interest and tax increased by 2.5% to $3,068.4 million. Net profit increased to 2183.4 representing 2.8% increase. Woolworth seeks to return capital to shareholders when the view is consistent with the goal of capital structure and in cases where shareholder value will be enhanced. By the end of 2012 financial year, the company paid a final dividend to shareholders ( Moscardo, 2013 p.123). Considering the trading environment there was no activity of share buy backs in 2012 and none is expected in 2013. The 2012 payment of dividend will return about $658 million in franking credits to the shareholders.
Woolworth utilizes its strong balance sheet to fund new growth opportunities like property pipeline and the new masters home improvement business. In March 2012, the company issued a $500 million of medium term notes into their domestic market which had a maturity of 7 years. According to Russel and Cohn, (2012 p.190), maturity included a $600 million in perpetual hybrid notes while the immediate term has no maturities debt. As at 30th June 2012, Woolworth had $3.4 billion in undrawn bank loan facilities. Currently, Woolworths operates 38 Masters Stores, which have operated for an average of 15 months. The company’s goal is to open about 49 stores by the end of June 2014.
Woolworth has in some respect proven itself as a superb retailer through its important liquor and food business. However its performance at the operations of Dick Smith Holdings Ltd hinders the ability of the management to run a retailer efficiently from its main competency of liquor and food. Wesfarmers is winning the completion but if Masters prove to be a viable opponent to Bunnings it will have the potential to add significantly to Woolworths’ future earnings.
Currently, Wesfarmers has an easy task. Its business of Coal operates at a lower margin than the supermarket business of Woolworth and it will soon close the gap. Its revenue base is also small and it is thus easier to achieve revenue increase. The high profits enjoyed by Wesfarmers ‘Bunning business makes Woolworths move into the sector of home improvement through Masters. Before purchasing any stock, an investor should always ask for a margin of safety and if both companies’ looks fully priced it would not be a good time to purchase from either. However, the lower risk Coles’ goal of expanding its profit margin that will boost the firm’s earnings by a very high percentage seems like a safer move compared to the Woolworths thought of sinking hundreds of million dollars to create market share in the unchartered hardware territory (Woolworths Holdings Ltd- Annual Report, 2012, p.20). Bibliography
Anonymous2012, Aug 16. Preliminary 2012 Wesfarmers Earnings Presentation - Final. Fair Disclosure Wire
Anonymous2012, Dec 03. Wesfarmers Management Briefing on Kmart Division - Final. Fair Disclosure Wire.
Moscardo, G. (2013). Sustainability in Australian business: principles and practice. Milton, Qld, John Wiley and Sons Australia.
Roth, M. 2013, Top Stocks 2014: A Sharebuyer’s Guide to Leading Australian Companies. Wiley.
Russel, J. and Cohn, R. 2012. Woolworths Limited, New York: Oxford University Press
Westbrook,I. 2014. Strategic Financial and Investor Communication: The stock Price Story. New York: Routledge.
Woolworths Holdings Ltd- Annual Report, 2012. 2012. Kuching: Reportal. SDN. BHD.
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