Introduction

The below report reviews Australian Company, Woolworths Group Limited (ASX: WOW) which is one of the largest retail players in Australia and New Zealand. The Company has retail interests in multiple industries.

Hence, the report will discuss company background, various lines of business, the Board members and their competence, governance, sustainability, ethical environment. The report will also throw some light on legal and regulatory aspects as well as auditor’s independent report.

The report will then move to financial aspects that involve discussion of major line items such as revenue, profit, dividend, equity stake, major movement during the year etc. The report will also perform a brief horizontal and vertical analysis so as to determine how the company has performed.

Based on this analysis, a recommendation will be made whether the Company is a good investment or not.

Part A: Background

Company Overview

Woolworths Group Limited (ASX: WOW) was founded in 1924 and is headquartered in New South Wales, Australia. It is one of the largest retail players in Australia and New Zealand. The Company has retail interests in multiple industries such as, supermarket (under the brand of Woolworths and Countdown), discount department store (under the brand name of Big W), takeaway liquor (under the brand name of BWS and Dan Murphy), hospitality (under the brand name of Australian Leisure and Hospitality Group). In terms of revenue, the Company is the second largest retail player in Australia and New Zealand, after Wesfarmers (Company Annual Report, 2019).

As of 2019, the Company reported $59.98billion of revenue, an increase of 5.3% from previous year and a net profit for equity holders of $2.69billion, an increase of 56.1% from previous year. As of 2019, the Company had 196,000 employees working through more than 3,200 outlets and hotels (Company Annual Report, 2019).

Operations

As of 2019, the 3200+ retail operations of the group can be categorised as follows (Company Annual Report, 2019):

Ethical Environment

Community: The Company takes its responsibility towards community seriously with an investment of round $44.3mn in 2019 attributed directly to the community. This is equivalent of 1.40% of the company’s earnings before interest and taxes. Around 18.8million meals were distributed through relief programs (Company Annual Report, 2019).

Health: As far as customer preferences regarding healthy food are concerned, the Company is trying to cater to that as well through launch of 640 new Own Brand products across the Macro and Free-From ranges. These products have attained double digit growth indicating acceptance by the people who want healthy and convenient food options. The George Institute for Global Health also awarded the healthiest Own Brand award to the company with majority of products rated 3.5 health stars or above on a scale of 1-5 health star rating (Company Annual Report, 2019).

Sustainability: The Company focuses on Climate-change related risks and to this end, the Company has reduced carbon emission by 18%, generated more than 10,500 megawatts of solar energy and diverted waste from landfill to the tune of almost 369,000 tons (Company Annual Report, 2019).

Responsible Sourcing: The Company launched responsible sourcing program in 2018 whereby the objective is to promote workers’ rights, in all parts of supply chain and also source its materials in a responsible fashion. For this purpose, the Company trains and briefs the staff, supply chain members and also holds periodic audits and investigations on need basis (Company Annual Report, 2019).

Legal & Regulatory Environment

The legal and regulatory compliance is adhered to as applicable to the business of the Company. The Group’s Compliance Framework and Code of Conduct assist in this regard. The Company also has an in-house legal team to handle various conflicts and litigations that the Company may be involved in. 

Director’s Report Review

The members of the Board of Directors are as follows:

The above members have diverse range of skills and experience as required for running the business. The Board is also well diversified with 56% females and 44% males. 

Auditor’s Statement

The independent Auditor of the Company is Deloitte Touche Tohmatsu. The Independent Auditor’s Report is available as part of the Company Annual Report, 2019. For the year ending June 2019, Deloitte has given an unqualified report for the Company stating that the Financial Report of the Company, comprising of the Consolidated Statement of Financial Position, Consolidated Statement of Profit or Loss, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and the Consolidated Statement of Cash Flows for the year ending June 2019 gives true and fair picture of the Group’s financial position and performance for the year and is in accordance with Australian Accounting Standards and the Corporation Regulations, 2001.

The Report also mentioned $166 million impairment charge with respect to the Big W stores losses. After completing the review of Big W, the Company will be closing 30 stores and 2 distribution centres in the next three years. Additional onerous leases also have been provided for.  

Part B: Financial Statement Review

Figures & Structure of Financial Statement

• Sales: The Company reported sales of $59.984 million in 2019, an increase of 3.4% from previous year. The report also provides a breakup of sales for various activities of the Company. The major revenue is from Australian Food ($39,568 million). 
• Gross Profit Margin: The Company reported a margin of 29.1% in 2019, decline of 23 bps from previous year. This was mainly attributed to higher stock loss in Australian food sales mix.
• EBIT: The Company reported EBIT of $2,724 million in 2019, an increase of 5.0% from previous year. The major increase was on account of 10% increase in second half of the year. This also includes impairment charge against Summergate and a one-off payment from Caltex.
• Profit for Equity Shareholders: The Company reported NPAT of $1,752 million in 2019, an increase of 7.2% from previous year. This is normalised increase while the statutory increase was 56.1%.
• Fixed Assets: The addition of $2,040 million was mainly on account of store refurbishments, supply chain and infrastructure.
• Net Assets held For Sales: The decline of $575 million was mainly on account of sale of Petrol Business to EG Group.
• Operating Cash Flow: Net CF from operating activities was in-line with previous year with an increase of 0.5% to reach $3,858 million.
• Shares: In May 2019, the Company initiated $1.7 billion off-market share buy-back. 
• Dividend: A total of $1.4 billion was paid in dividend to equity shareholders during the year.

Difference between Performance & Position of Current & Previous Year 

Horizontal Analysis

The above analysis indicates increase in revenue, gross profit, profit for equity stakeholders and total comprehensive income. The current assets reduced mainly on account of sale of petrol business to EG Group. The borrowings increased by almost 30% on account of bank loans and also securities worth $500 which matured and were refinanced with $400 million medium-term notes.

Ratio Analysis

The above ratio analysis indicates that solvency and liquidity ratios of the company indicate a slight decline from 2018. Current Ratio reduced from 0.78 to 0.73 in 2019 while liquid ratio reduced from 0.31 to 0.23 in 2019. This is mainly on account of assets held for sale that declined on account of sale of petrol business. While the Gross profit margin declined slightly from 29.34% to 29.08%, the net profit margin improved from 3.03% to 4.49%.

Part C: Conclusion & Recommendation

We saw above that Woolworths is an established Company which is almost 100 years old and remains one of the largest retail players in Australian and New Zealand Markets. It has multiple brands in its kitty with diverse lines of business. The Board is experienced and has requisite skills. The Company is also aware of its social responsibility towards community, environment and society as a whole.

The newly launched brands have performed successfully and the Company seems to have the finger on market pulse. The Company is also actively seeking out loss-making lines of business and closing them down or selling them out so as to be able to focus on its core strength. 

Financially, the Company has outperformed in 2019 with increase in profit and revenue. The dividends are strong and Company also bought back its shares. The P/E ratio is 17.10 times indicating high earning expectation of investors. The stock price is also stable as seen below (Australian Financial Review, 2020):

Hence, it is recommended that Woolworth is a good investment and can be bought with a long-term perspective.