Woolworths: Steady as she goes

A good result, despite a tough consumer mood. Woolworths continues to deliver

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published March 1, 2012 4:59 pm AEDT

Woolworths Limited (ASX: WOW) has today released its half yearly profit report for 27 weeks to 1^st January 2012. Net profit after tax (from continuing operations) was up 3.5% to $1,184m, the company also announced a 3.5% increase in interim dividend to 59 cents per share.

The company expects trading to be subdued over the remainder of the year as a result of prevailing weak consumer sentiment. Woolworths expects net profit after tax for the full 2012 financial year to grow between 2% and 6%.

Dick Smith provision and divestment

The result however was impacted by a $300m provision against the consumer electronics division, which is associated with the company's plans to restructure and divest the Dick Smith business. Including this provision results in a 13.5% fall in EBIT to $1,545.4m, compared to $1787m in the previous corresponding period.

According to the company, a number of potential purchasers have expressed interest, and it appears that the divestment will be finalised by the end of June 2012.

Home Improvement

Woolworths' home improvement offering, Masters, appears to be gaining momentum with sales increasing by 16% for the first half, and increasing by 26.6% in the second quarter. There are currently seven stores open, and a further eight planned to open before the end of June 2012.

Other businesses

Most other businesses appear to be performing steadily, with Australian Food and Liquor, and Petrol EBIT up 6.3% and Petrol also up by 6.3%. New Zealand supermarkets had a strong half with growth in EBIT of 9.1%.

Hotels continue to grow with EBIT up by 3.8% and the company announced the acquisition of 12 hotels in Western Australia. An additional agreement to purchase an additional 31 new hotels and 2 bottle shops is currently subject to ACCC approval.

Big W reported a 4.3% decline in earnings before interest and tax (EBIT) and the company has announced several different strategies to try to improve Big W's performance, such as Daily Deals, online sales and the launch of the Big W iPhone application.

Financials

Woolies has managed to grow its gross margin again, the fifth year in a row, to 26%, which is outstanding. Return on equity has fallen slightly to 14.6%.

Cash flows continue to be strong at $1,672.1m, despite falling 10.4% compared to previous corresponding period, and was mainly been impacted by the growth in the home improvement business (costs are up as the company stocks the shelves in its Masters stores).

Debt has increased by $657.2m to $4130.3m, but is still manageable compared to over $8bn in equity. Earnings still cover the interest bill 10 times over.

The future

The company is still rolling out or acquiring new stores (see the table below).

Source: Company report

The Foolish bottom line

Woolworths' management have been busy, yet again and the company's main businesses continue to grow steadily. Management are addressing the problem areas of its business (Big W), divesting non-core operations (Dick Smith), expanding into home improvement and all the while developing new strategies to get consumers to spend more in Woolworths' stores. The company has embraced online shopping and is rolling out more functionality and applications to help shoppers.

A good result from an outstanding company, which should be considered a core holding for anyone's portfolio.

If you are looking for ASX investing ideas, look no further than "The Motley Fool's Top Stock for 2012." In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.

More reading

Motley Fool contributor Mike King owns shares in Woolworths. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.