Amid yesterday’s losses on the market, investors came to their senses and stopped the sell-off in Woolworths that developed late Friday.
The shares edged 11c higher yesterday to $26.25 after Friday’s near 7% fall, or $1.86.
As the overall market lost 2/8% yesterday and hit six year lows, sceptical investors rediscovered the safety Woolies shares in stressful times.
It could have been a case of unrealistic expectations from some investors on Friday but there was definitely a feeling of unhappiness about the retail giant’s first quarter result.
Yesterday’s small rebound was more due to the overall market weakness.
Woolies profit failed to top a billion dollars in net profit for the first half (it’s best half of each year, containing Christmas): the $983 million was up due mostly to a very solid performance in the Australian food and liquor business where earnings grew faster than sales and margins again improved.
New Zealand and consumer electronics were the downers, especially for local analysts.
The result, along with that from QBE, was described by one broker as among the major disappointments of the interim reporting season.
Others were a bit more circumspect and still have the retailer on the love list (with some qualifications about NZ and the consumer electronics businesses CE (Consumer Entertainment).
UBS said that WOW’s negative share price reaction on Friday (-7%) "Was more than our earnings downgrade highlighting the vulnerability of its steep PE premium.
"However we think this was overdone & creates a buying opportunity.
"WOW remains a high quality defensive (c90% earnings non-discretionary) with a strong balance sheet that provides certain funding for future capex, corporate action and/or capital management.
"Earnings upside potential may now be less likely but we see downside risk as limited given the small re-basing."
Citgroup said.
"While solid, WOW’s 1H09 result demonstrated the risks of its premium PE rating. Food & Liquor Australia was very strong, but earnings were dragged down by Consumer Electronics and New Zealand.
"These pressures will likely persist in 2H09e and we have also lowered our FY09e and FY10e EPS by ~2% accordingly.
"We expect WOW to achieve FY09: NPAT growth of 9%, at the bottom end of its 9%-12% guidance range.
“The earnings growth in Food & Liquor is likely to underpin group profitability given recent capital expenditure.
"WOW’s sharp 32% decline in operating cash flow reflects a normalisation of its working capital position. We expect a cash realisation ratio of 100%-105% in future periods.
"We estimate WOW’s (Cost Of Doing Business) CODB rose 8% in Food & Liquor Australia. Operating leverage is more important than supply chain initiatives and therefore highlights the margin risks from any slowdown in comparable store sales growth.
""We expect the shares to trade within a range of $25.00 to $28.00 based on our sum-of-the-parts and Discounted Cash Flow (DCF) valuations.
“We expect the stock’s PE premium to remain given continued momentum for the Food & Liquor Australia division."
"Virtually all Woolworths’ 1H09 EBIT growth came from its Food & Liquor Australia segment. We expect this division will likely account for 80% of group EBIT in FY09e.
"Strength in Food & Liquor Australia continuing. We forecast full-year 2009 EBIT to rise 16%, with a slight acceleration in margin expansion through lower fuel costs, and EBIT margins to rise 50bp to 6.81%.
"New Zealand margin contraction to diminish. Food & Liquor New Zealand is likely to experience another half year of earnings declines. We forecast EBIT to fall 17% in Australian dollar terms and 4% in NZ dollar terms.
“The division is experiencing higher wage costs which will likely persist into 2H09. These costs are associated with the Kiwisaver pension scheme and higher youth wages.
"Consumer Electronics margin deterioration to abate. We expect Consumer Electronics earnings to fall 16% in 2H09e as the company focuses on higher ticket, lower gross margin items.
“ These items will provide higher comparable store sales growth, but we expect the volume growth to be insufficient to offset operating cost growth.
"The division is undergoing a major overhaul with the Tandy and Dick Smith Powerhouse brand to be eliminated. We expect challenges for the company to generate sufficient sales per square metre in small stores (~400sqm) to match key rivals like JB Hi-Fi."
Merrill Lynch said
"Woolworths’ 1H09 profit was very solid, with the core underlying businesses (Australian Food & Liquor, Big W and Hotels) generating excellent results.
"However, there were elements of softness…that took some of the “icing off the cake”.
"These elements included NZ Supermarkets and Consumer Electronics (CE). There was also less profits on property sales, which is probably a positive.
"Operating cash flow also concerned us, falling from the unsustainable $1,952m in 1H08 to $1,327m in 1H09.
"There was a very large impact on payables due to timing – where the period end shifted this half. Adjusting for this timing difference, operating cash flow was $1,667m – giving an outstanding cash realisation of 123% albeit beneath cash realisation of 137% in 1H08.
"In 1H09, Woolworths net capex was $930m…materially ahead of its 1H08 spend of $639m. Coles Group 1H09 capex was less than $300m – creating a significant dichotomy in growth strategies between Woolworths and Coles.
"Our concern is WO
