Woolworths: COVID-19 anniversary nears
About the author:
- Author name:
- By Alex Lu
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- Date posted:
- 24 February 2021, 3:00 PM
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- Woolworth's (ASX:WOW) 1H21 result overall was well ahead of our expectations.
- Key positives: Big W was the key standout with the turnaround gaining momentum; Hotels earnings were not as weak as we expected; COVID-19 costs as a percentage of sales was down to 0.8% in 1H21 vs 2.0% in 2H20.
- Key negative: NZ Food was weaker than we anticipated and was the only division (other than Hotels) that did not deliver EBIT margin expansion.
- We increase FY21F underlying EBIT by 7% to A$3,657m. Our target price rises (login to view) and we maintain our Hold rating.
1H21 result was comfortably above our expectations
1H21 underlying EBIT increased 11% to A$2,092m (+9% vs Morgans) while underlying NPAT rose 16% to A$1,135m (+14% vs Morgans).
All divisions except for Hotels delivered earnings growth with EBIT for the core Australian Food business up 13% (+4% vs Morgans).
Australian Food LFL sales rose 9.3% (vs Coles Supermarkets +7.2%) driven by ongoing COVID-19-related demand as well as a successful Disney+ Ooshies campaign.
Sales growth however moderated through the half (1Q21 LFL sales +11.5%; 2Q21 +7.1%) as COVID-19 restrictions eased. The balance sheet remains strong with net debt (ex-leases) of only A$447m while 1H21 DPS of 53cps was above our 46.5cps forecast.
Big W turnaround gaining momentum
Big W was the key highlight of the result with EBIT up 166% to A$133m (+111% vs Morgans), continuing an impressive turnaround of the business that was loss-making between FY16-19.
LFL sales grew 21.5% with strong growth across all major categories as Big W’s offer continues to resonate with families. Endeavour Drinks’ performance was solid with EBIT up 24% (+12% vs Morgans) as COVID-19 continues to drive elevated inhome consumption.
Hotels earnings were lower (EBIT -46%), albeit better than we expected (+28% vs Morgans), reflecting government-imposed trading restrictions.
2H21 off to a good start
Management advised that for the first seven weeks of 2H21, sales in Australian Food were ~8% higher, NZ Food was up 1%, Big W growth was 18% and Endeavour Drinks was up 14%.
Hotels sales were down 12% but with a lower rate of decline than 2Q21. Looking ahead to the rest of FY21, management expects sales to decline over the Mar-Jun period in all businesses (except Hotels) due to the cycling of the COVID-19-surge last year.
Overall, we forecast FY21 underlying EBIT to be up 14% to A$3,657m. WOW also intends to complete the separation of Endeavour Group by June 2021, via either a demerger or value-accretive alternative, with further information provided over the next few months.
Maintain Hold rating
Following the better-than-expected 1H21 result we increase FY21F underlying EBIT by 7% to A$3,657m. Our PE-based target price rises (login to view) and we maintain our Hold rating.
While WOW’s overall performance remains strong, trading on 24.3x FY22F PE and 3.0% yield we to see the stock as fully valued. We continue to prefer Coles (COL) (Add rating) in the Staples sector.
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