Few Surprises In Woolies Sales Result

This story features WOOLWORTHS GROUP LIMITED. For more info SHARE ANALYSIS: WOW

By Chris Shaw

First quarter sales growth for Woolworths ((WOW)) rose 4.1% to $13.9 billion, a result good enough for management to retain full year earnings guidance of 8-11% net profit after tax growth.

Sales were slightly softer than some in the market had expected, UBS attributing this to a weak result from Big W thanks to heavy price deflation and an adverse impact from currency movements. This was enough for the broker to take a more conservative view on the outlook for discretionary sales leading into Christmas, though the impact on earnings forecasts has been minor.

RBS Australia also noted the attempt to water down expectations leading into Christmas, reflecting an acceleration of price deflation in general merchandise categories in recent months. In RBS's view this trend could remain a problem into the second half of 2011.

With respect to food and liquor sales performance, Citi notes the quarterly sales result showed zero price inflation while volumes excluding tobacco rose by 1.3%. Citi expects food inflation will start to emerge early in 2011 given increases in input costs in the bakery, meat and dairy sectors, which it expects will flow through to an improved pricing environment in the second half of FY11.

Non-food items appear a greater challenge according to Citi as it estimates price deflation could have detracted 4-6% from Big W sales growth in the quarter. While improvements are expected going forward the outlook appears less positive than for food and liquor.

As well, while new store sales contributions in the quarter were weak, Citi attributes this to timing issues rather than poor store locations. An improvement in this measure in coming months should also prove supportive to earnings in the broker's view.

For Macquarie, the Woolworths sales result is not a brand issue as food and liquor sales value growth of 3.2% was better than market growth rates. As well, the broker suggests top-line growth continues to be solid despite disruptions in a number of businesses.

Like-for-like growth in the quarter was 1.2% for food and liquor. Credit Suisse notes while this is at the low end of historical benchmarks management remains comfortable with respect to earnings guidance, which implies some productivity improvements are expected.

If sales growth accelerates in the second half of 2011 on the back of rising food manufacturing cost pressures and commodity prices, Credit Suisse sees upside risk to current earnings guidance. At the same time, the broker suggests there is little downside risk to group earnings even given the current uncertainty with respect to consumer spending.

At present Credit Suisse is forecasting earnings per share (EPS) for Woolworths of 183.9c in FY11 and 205.8c in FY12. Consensus EPS forecasts according to the FNArena database stand at 179.9c in FY11 and 197c in FY12.

Conservative estimates from JP Morgan and BA Merrill Lynch are keeping consensus numbers below the forecasts of Credit Suisse, while Macquarie is above market with its forecasts for the next two years.

Goldman Sachs continues to rate Woolworths as a Hold post the sales result as there is no change to its expectation of solid medium-term earnings growth. At present Goldman Sachs estimates Woolworths is trading on a 6% premium to the All Industrials ex banks, a level the broker sees as appropriate given the quality of the franchise and the company's moderating growth profile.

The FNArena database shows a relatively even spread of views on Woolworths as the stock is rated as Buy three times, Hold four times and Sell once. The buys from Citi, Macquarie and Credit Suisse reflect the view there is still value in the stock.

Morgan Stanley is not in the database but also rates Woolworths as Overweight within an In-Line view on the Australian retail sector. This reflects the broker's view the stock offers value at present, particularly given an expectation margin expansion can be achieved via private label products in particular.

UBS has joined the Holds, downgrading from a Buy rating post the sales result given what the broker suggests is a lack of shorter-term positive catalysts. Woolworths shares are trading around fair value at present in the view of UBS.

BA Merrill Lynch is behind the Sell rating, taking the view the strategies implemented by management at Woolworths over the last few years to grow the business have simply not delivered the anticipated results.

According to BA-ML this suggests a risk management is trying to meet guidance rather than build the business, something the broker suggests could result in some poor decisions being made. This risk is not being priced in at current levels in BA-ML's view.

The FNArena database shows an average share price target for Woolworths of $30.17, which is little changed from prior to the sales result. BA-ML is the most bearish with a target of $24.50, while Macquarie leads the way with a price target of $33.96.

Shares in Woolworths today are weaker and as at 11.20am the stock was down 23c at $28.65. Over the past year Woolworths has traded in a range of $25.19 to $30.18 and the current share price implies upside of around 4.6% to the average price target in the FNArena database.

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