Woolworths (ASX: WOW) has released FY20 profit guidance for the market to think about.
What is Woolworths?
Woolworths was founded in 1924 by Percy Christmas, with its first store opening in Sydney’s Imperial Arcade. Woolworths has gone on to become Australia’s largest supermarket business, operating Woolworths supermarkets in Australia and Countdown in New Zealand. It also runs the retail department store Big W as well as liquor stores Dan Murphy’s and BWS. With over 3,000 stores and more than 200,000 employees, it’s one of Australia’s largest employers.
Trading update and significant items
Woolworths has announced plans to develop an automated regional distribution centre and a semi-automated national distribution centre in Sydney. Construction is expected to completed by 31 December 2023. Initial benefits will be realised in FY25.
Woolworths expects to invest $700 million to $780 million on the technology and fit out. It has signed an initial lease term of 20 years with Qube (ASX: QUB). It’s expected to significantly reduced supply chain costs over time and deliver strong returns above the cost of capital.
The decision to proceed with this will result in a one-off pre-tax cost of $176 million in FY20. Other significant items in FY20 will be $230 million for Endeavour Group (Dan Murphy’s, etc.) transformation costs and $185 million for staff remediation for wage underpayments. The planned separation of Endeavour Group has been delayed due to COVID-19.
Trading update
In the FY20 fourth quarter for the 10 weeks ending 14 June 2020, Australian Food sales are up 8.6%, New Zealand Food sales (in NZ dollar terms) are up 15.1%, Big W sales are up 27.8% and Endeavour Drinks sales are up 21.4%.
When Woolworths announced its third-quarter sales it said it expected fourth-quarter COVID-19 costs to be between $220 million to $275 million — the company is now expecting this to be at the high end of the range for the quarter.
Woolworths hotels have begun to open by around two-thirds of venues are in Victoria and Queensland where operating conditions remain more restricted, particularly for gaming. The Hotels division is expected to be loss-making until more venues operate with a full-service offer.
FY20 profit guidance
Woolworths is expecting FY20 EBIT (after AASB 16, but before significant items) of $3.2 billion to $3.25 billion. Woolworths disclosed that FY19’s EBIT on a comparison basis (and on a 53-week basis) was $3.29 billion. Hotels EBIT is expected to be between $160 million and $170 million in FY20, compared to $355 million in FY19.
Summary
COVID-19 may have helped boost supermarket sales significantly, but it seems the overall Woolworths EBIT won’t grow compared to FY19 because other segments of the business were seriously affected. I wasn’t expecting Woolworths’ EBIT to be flat or even down in FY20 after a period of enormous supermarket sales.
It’s good to hear that Woolworths is investing for better efficiency and lower costs, but I don’t think Woolworths’ shares have a market-beating future ahead of them. It’s already such a large business. I’d rather buy shares of something like Bubs (ASX: BUB) for growth.
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Disclosure: At the time of writing, Jaz doesn’t own shares in any of the businesses mentioned.
