Woolworths (WOW) shares took a pounding yesterday, falling to a 10-year low, after ratings group Standard & Poor’s cut the retailers credit rating in the wake of the weak March quarter sales performance and clouded outlook.
In doing so S&P cut Woolies rating to the same level Moody’s did earlier this year.
At the same time, a number of analysts trimmed their profit forecasts for 2015-16 for the company (some by 10%, according to media report).
That’s underlying profit because the write-downs for Masters hardware adventure guarantees a full year loss, while any other write-downs flowing from the recently announced review of the company will add to the pool of red ink.
Woolies shares sank around 7% yesterday closed down at $20.71. That took the year’s loss to more than 14%.
WOW 2Y – Woolies shares reach a decade low
S&P lowered Woolies long term credit rating one notch to BBB from BBB+, citing continued market share losses in Woolworths’ key food and liquor business, anticipated losses at BIG W, and the company’s plan to invest an additional $150 million into reducing prices and improving service to restore sales growth in supermarkets.
“The downgrade reflects our view that Woolworths’ continuing weak revenue, earnings, and market share performance in its core Australian supermarket business will cause the group’s financial risk profile to sustain at levels outside tolerances for the previous ‘BBB+’ rating in the medium term,” S&P Global Ratings credit analyst Paul Draffin said in a statement.
Woolworths’ outlook was lifted from ‘negative’ to ‘stable’, indicating there’s no chance of another immediate downgrade. The Triple B rating is two levels above junk status. S&P warned a turnaround at Woolies would take several years to gain traction in the strong competitive environment, with execution risks to the crucial need to improve the in-store offering and a desperate need to boost staff morale.
Despite this the ratings agency was confident the lower rating would not come under pressure in the near-term.
“The stable outlook reflects our expectation that the group’s investment in price, service, and systems will support a stabilisation of market share and a return to satisfactory earnings growth in the next two-to-three years, despite near-term earnings and margin pressure,” Mr Draffin said.
“Importantly also, we consider that the company is committed to protecting credit quality at the ‘BBB’ rating level, and will actively manage its capital base to support credit quality if further earnings pressure occurs.”
S&P’s downgrade followed a similar cut earlier this year by ratings agency Moody’s Investor Services, which reduced Woolworths’ long term credit rating from Baa1 to Baa2 in March.
Woolworths noted the announcement by S&P and said Moody’s Investor Services rating remained unchanged.
“Woolworths remains committed to a solid investment grade rating and credit profile and is confident the execution of its strategy will deliver the best outcome for its customers and investors,” the retailer said in its statement.
The retailer’s weaker than expected March quarter sales with a small fall in comparable store sales and poor figures from the Big W chain, underlines the challenges ahead for new chief executive Brad Banducci in reviving the company’s fortunes.
In fact it wouldn’t surprise to see Woolies try to either sell or downsize Big W. But the retailer’s real problem remains – it is not as competitive in supermarkets as Coles is, and is being attacked by Aldi and Costco.
