Woolworths Group Ltd (ASX: WOW) shares briefly hit a 52-week high of $27.75 on Friday, following a research note from Citi. Analysts there have upgraded Woolworths to a "buy" and expect like-for-like sales growth of 4.2% for the full year, outperforming major supermarket rival Coles, which is owned by Wesfarmers Ltd (ASX: WES).
Citi's update follows recent positive reporting on Woolworths from Deutsche Bank and UBS, as well as broader market optimism towards Australia's leading supermarket as it recovers from the Masters Home Improvement failure. Since June 2016, Woolworths shares have risen 35%, but are still well-shy of the high $37's reached in 2014.
While the company's core supermarkets business continues to steadily improve, the same cannot be said of its perennially underperforming Big W brand. Woolworths instilled a new Big W management team and turnaround plan in FY2017, though it's beginning to seem like the discount department store will never turn.
Woolworths CEO Mr. Brad Banducci stated Big W had improved sales performance at the company's Annual General Meeting in November, however there is still a long way to go towards profitability. For FY2017, Big W contributed a loss of $150.5 million to group earnings before interest and tax (EBIT), and a large improvement is not expected this financial year.
The current environment of weak retail spending and intense sector competition from the likes of Wesfarmers' Kmart and Target will make Big W management's job even tougher. As a shareholder, I would prefer the brand be sold off, but who would buy it right now?
A more realistic scenario would be for Big W to get closer to break even once retail conditions in Australia eventually improve, then perhaps a potential buyer may emerge. I won't hold my breath.
Another headache for management is the ACCC's December decision to oppose BP's acquisition of Woolworths' service station network. Both BP and Woolworths have said they will assess their options, with the supermarket giant expressing disappointment as proceeds from the proposed $1.785 billion sale would have been used to strengthen the balance sheet and reinvest in core operations.
While the blocked sale is a distraction for management, I'm not overly concerned as the current service station arrangement with Caltex is at least profitable. In FY2017, the segment contributed $157.9 million to Woolworths' group EBIT.
Once seen as a stable, high-yield stock, Woolworths was forced to slash its dividend during the Masters fallout. With improving performance, the company increased its distributions by 9.1% last financial year, and I'm expecting a higher dividend again in FY2018.
Woolworths will provide its half-year earnings results to the market on February 23.
