Woolworths Limited (ASX: WOW) has been the bearer of bad news today after the supermarket giant downgraded its full-year earnings guidance and announced the shock resignation of its Chief Executive Officer, Grant O'Brien, who has held the position since October 2011.
Management overhaul
Woolworths has come under enormous pressure over the last 12 months or so, with management openly admitting their mistakes with the running of the business.
To begin with, the group's Masters Home Improvement division has been a constant disappointment for investors and remains heavily cash flow negative. At the same time, its core supermarket division has also recorded lacklustre growth due to the competitive pressure applied by primary rival Coles – owned by Wesfarmers Ltd (ASX: WES) – as well as discount retailers Costco and Aldi. More on that below.
While O'Brien acknowledged how honoured he was to have been part of the Woolworths group over the last 28 years, he said that "the recent performance has been disappointing and below expectations. I believe it is in the best interest of the Company for new leadership to see these plans (the strategies outlined at Woolworths' recent investor day) to fruition."
Notably, Woolworths confirmed that it was committed to implementing those strategic initiatives while it also said it was now at its most competitive position on price since January 2014. Further, it remains on track to exceed the forecast $500 million in cost savings across the 2015 and 2016 financial years and has identified additional opportunities to improve efficiencies.
Importantly for shareholders, O'Brien is committed to a smooth transition and a global search for a new executive (including internal and external candidates) is underway. O'Brien will continue to serve as CEO and Managing Director during this period.
Earnings downgrade
Due to the poor results achieved in recent times, many investors and analysts have called for a management overhaul and may not be too surprised, or upset, about O'Brien's decision to step aside. But they will be shattered to learn that Woolworths now expects an even worse full-year earnings result than previously anticipated.
Woolworths confirmed that trading conditions had remained tough in the fourth quarter (Q4'15) and provided an update on comparable store sales as follows:
- Australian Food and Liquor sales down 0.7% to date, with no improvements recognised in May and June;
- General Merchandise sales down 12.1% to date; and
- Home Improvement sales up 19.8%, including a 21.9% improvement for Home Timber and Hardware, and 17.7% for Masters
In February, Woolworths said it expected to achieve 1.8% growth in net profit after tax (NPAT) for the full-year. Unfortunately, due to the subdued trading conditions experienced in Q4'15, together with the high level of investments it has made in its core supermarket division, it now believes NPAT before significant items will be "broadly in line with the prior year", which was $2.45 billion.
When significant items are included however, FY15 NPAT will fall to around $2.15 billion – a 12% decline compared to last year's result. As a result, investors should brace themselves for a rough session.
