What the market is expecting from the Woolworths results

Food and clothing retailer Woolworths, long an investor darling, has been under pressure, shedding more than 35% from its 2016 highs.

The group, which has expanded significantly in Australia, will be releasing its results for the 52 weeks to 25 June tomorrow. Based on its trading statement, released on 13 July, the market is expecting the following: 

Earnings & sales guidance

In terms of year-on-year sales growth, the Woolworths Food division looks to have continued its trend of leading the group’s divisional sales (+8.6%). 

The David Jones and Woolworths South Africa’s Clothing & Merchandise sales divisions have been relatively flat (+1% and +1.4% respectively), while Country Road group sales have increased by 5.1% (in Australian dollar terms), aided by the newly acquired Politix, which added 3.7% to sales.
 
Earnings per share are expected to have increased by between 20% and 30% over the period. 

However, the increased earnings have been boosted by David Jones’s disposal of its Market Street property in Sydney, Australia as well as the benefit of a lower effective tax rate over the reporting period. 

Excluding the disposal, headline earnings per share for the group look to have actually contracted over the period by between 5% and 10%. 

Comments

While the Food Division has achieved decent growth over the year, it is a far lower margin business than the Clothing and Merchandise division, which has stagnated over the year (and in fact contracted in the second half). The growth in Australian operations is encouraging (despite being mainly acquisitive) in what is a competitive and constrained consumer environment. 

The initial reaction to the trading update from Woolworths was positive, sparking a strong move higher in the share price from the multiyear low. The company, as well as the rest of the retail sector, has also extended gains following the South African Reserve Bank’s decision to cut interest rates.

The assumption is that this may have been the start of a monetary easing cycle, which would improve the health of the domestic consumer and hopefully stimulate increased spending.

The resulting share price move in Woolworths following tomorrow’s results is likely to be dictated by which end of the earnings guidance the actual figures are realised. 
Key focal points in the results will be margin trends (particularly that of Country Road), further guidance relating to David Jones synergies, Woolies’ food strategy as well as the group’s outlook for the new financial year. 

Broker ratings & target prices

The mean of analyst estimates, as polled by Standard and Poor’s Global, arrives at a longer term target price for Woolworths of 7 097c per share. Of the 13 brokers polled by Thomson Reuters, one rates the stock a strong buy, one a buy, eight a hold, and three a sell.

Shaun Murison is a senior market analyst at IG.