Woolworths Group Ltd (ASX: WOW) has announced its intention to separate itself from its liquor and hotels businesses by the end of the 2020 calendar year, retaining a minority stake in the business. Holders of the company may be concerned about the implications for Woolworths' revenue streams. At the time of writing, the Woolworths share price was trading at $33.92.
How will the Woolworths demerger work?
Demerging different elements of a business is a complicated exercise at the best of times, and the demerger of Endeavour Drinks and ALH Group is no different. In essence, those two businesses would be merged in the latter part of the 2019 calendar year. The combined entity would then be separated from Woolworths 'through a demerger or other value-accredited alternative' some time in 2020. This decision would be subject to shareholder approval at the 2019 AGM.
Why demerge?
Competition in the core food and supermarket business of the Woolworths group has been intensifying of late, and that looks slated to continue with increasing pressure from rival Coles Group Ltd (ASX: COL), disruptor Aldi, and 2019 newcomer Kaufland. Woolworths has indicated that the move away from its liquor (which notably includes the BWS chain) and hotels businesses is principally designed to allow the company to focus on the core food and essentials markets.
Woolworths financial analysis
Like any large business, the structure of Woolworths is somewhat complex. It appears that the management of Woolworths view the decision to step away from the bricks-and-mortar operations of its liquor and hotels business as one that is aimed at reducing the complexity of its operations, and perhaps to facilitate a move toward an increased online, on-demand offering.
The financials remain strong for the company, however, with earnings-per-share expected to continue growing by 6.6% annually through 2020 and 2021. During that same time, revenue is expected to climb from $60.297 billion in 2019 to $63.532 billion in 2021. Dividend yield is expected to reach 112.2 cents by 2021.
Other headwinds
The company is also experiencing some difficulty with the Big W arm of its business operations, which it attempted to address in April 2019 when it announced the rolling closure of some 30 locations of the chain over the next three years. If the company fails to return the Big W arm to profitability, it will continue to dent the earnings of the Woolworths Group.
Foolish takeaway
Despite the strong financials discussed above, there are a number of potential headwinds. The complexity of the proposed demerger means that it is very difficult to predict the impact it will have on the earnings of the Woolworths Group. Although the strong dividend yield in particular make it an attractive prospect for investors, it may be more prudent to wait for the consequences of the proposed demerger to become clear before jumping in.
