Woolworths has been on the nose with investors for a while now.
Sales are flatlining while discount competitors keep taking market share and the main competitor, Coles, keeps growing.
Two years ago, the shares were trading at a high of $38. Today they are at $23.54.
The Coppo Report by Richard Coppleson at Bell has been negative on Woolowrths for some time.
“I’ve been negative of this for a long time (since $34 from around Oct 2015 after poor sales result) and every time in the last 15 months when someone says should I buy I’ve always said NO — buy Wesfarmers — Woolworths still looks terrible — stay away.”
However, he’s changed his mind.
“But for the first time in years I think now is the time to start buying Woolworths,” he writes.
“The stock has fallen 41% in the last 2 years and that fall has been 100% justified by the collapse in their EPS.”
The red line in this chart shows the decline in EPS and the white line the share price:
Among the reasons Coppleson quotes for his change in position is the new CEO, Brad Banducci who has promised a full review of the business.
The new management has recognised the need for a new operating model centred on the food and liquor business. Third quarter sales at Woolworths food and liquor were up just 0.4%.
“We know from history that Woolworths was a really great company, it dominated, it has great assets, a great name, great spread across the country but it’s been missing one thing — good forward looking management,” he says.
“There is no doubting that it is a high-quality business that generates a lot of cash, but there is no argument from anyone — that it has been poorly mismanaged in the past.
“But we have a new Board, a new CEO and the closure of Masters, which was a loss-making business and has been taking up too much of management’s time on a business that just keeps losing money. Without it management can get back to the basics and focus on fixing their food and liquor business.”
Both main players, Woolworths and Coles, are under assault by small, discount players.
Aldi currently has about 11% of the market. And ratings agency Moody’s believes that share will increase further, driven by more rapid store expansion, more investment in advertising and marketing, and higher customer spend per visit.
UBS, in its latest research, 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.
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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