Our opinion on the current state of WOOLIES(WHL)Woolworths (WHL) has been navigating a challenging few years, primarily due to the ill-fated acquisition of David Jones in Australia for AU$2.1 billion in 2014. This acquisition has resulted in significant write-downs totaling R12 billion, putting immense pressure on the group's financials. The purchase has been widely viewed as a strategic misstep by Ian Moir, the former CEO. Fortunately, Woolworths' food division has remained resilient, contributing positively to the group's overall performance.
In January 2020, Woolworths brought in Roy Bagattini from Levi Strauss to replace Moir as Group CEO. Under Bagattini's leadership, the company has focused on cash generation, working capital management, and reducing debt levels. This strategy has helped improve its cash conversion ratio to nearly 95%, with a solid return on capital employed at 18.7%, significantly above its cost of capital.
For the fiscal year ending June 30, 2024, Woolworths reported a modest turnover increase of 4% from continuing operations, but headline earnings per share (HEPS) fell by 16.8%. The group's net debt stands at R5.6 billion, with a debt-to-EBITDA ratio of 1.45x, which is within its target range. The Australian segment, despite its historical challenges, is now in a net cash position of A$39 million.
In a trading update for the 18 weeks to November 3, 2024, the company reported encouraging growth, especially in its food segment, which saw turnover increase by 12.1%. The Fashion, Beauty, and Home (FBH) division showed signs of recovery, with turnover up by 3.5%. These results suggest a gradual improvement in Woolworths' core business areas, especially as consumer confidence improves.
Technical Analysis and Outlook:
We previously advised waiting for Woolworths' share to break through its long-term downward trendline before considering it for investment. This breakout occurred on September 19, 2024, at a price of 6654c. Since then, the share price has moved slightly higher to 6768c, indicating the potential beginning of a new upward trend. With a current P/E ratio of around 18.58, the share looks fairly valued given its recent performance improvements.
Conclusion:
While Woolworths still faces challenges, particularly with its Australian operations, the focus on cash flow, reduced debt, and strong performance in the food division are positive signs. The share now appears to be entering a new upward trend, making it a potential consideration for investors seeking exposure to a well-managed retail stock with improving fundamentals. However, given the company's past missteps, cautious optimism is advised.
