UBS: Sacking 500 people and another $1 billion writedown won't help Woolworths

Photo: Quinn Rooney/Getty Images

Woolworths, which has posted $4.2 billion in impairments in the last two months, still has a long way to go before it starts to see significant sales growth.

The supermarket group is unlikely to maintain its share of the market faced with an active Coles and double-digit growth at discount competitor Aldi which currently has about 11% of the market.

Woolworths sales have been flat while its main competitor, Coles, reported 5.9% growth in its latest quarterly results.

The ratings agency Moody’s believes that Aldi’s market share will increase further, driven by more rapid store expansion, more investment in advertising and marketing, and higher customer spend per visit.

And UBS has reiterated its sell rating on Woolworths, with the second half of 2016 expected to show deteriorating like-for-like sales trends in grocery.

“In our view the turnaround will take longer and cost more than many expect,” according UBS analysts Ben Gilbert, Craig Stafford and Apoorv Sehgal in a note to clients.

A recovery isn’t expected until the second half of 2017.

Woolworths shares closed down over 3% to $23.51. The shares rallied 8% yesterday after the announcement of writedowns and restructuring costs, including shedding 500 jobs and closing 30 stores.

Woolworths is losing share at an accelerating rate, according to this chart from UBS:

“Recent trading suggests WOW will continue to lose share, with Coles stepping up intensity, share loss at IGA slowing and double-digit growth at Aldi,” says UBS.

UBS sees Woolworths as a great company but believes a turnaround will cost more and take longer.

“We believe the risk of further earnings and share price downside is high, particularly if WOW is not able to show signs of improvement,” UBS says.

In February, Woolworths posted a loss of $972.7 million for the first half of the financial year, its first for more than 20 years, driven by a massive $1.9 billion writedown in the value of the troubled Masters hardware business.

The main business also was weaker with sales dropping 1.4% to $32 billion. And Australian food and liquor sales were flat at $22.34 billion, up just 0.7% over the six months.

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