Digital Transformation And BIG W Expansion Will Improve Customer Engagement And Efficiency

Key Takeaways

• Woolworths' digital focus and AI adoption are expected to drive operational efficiencies and lower costs, improving net margins and earnings.
  
• Rebranding stores and supply chain enhancements aim to boost sales, brand recognition, and EBIT margin through cost efficiency.
  
• Elevated cost of living and competitive pressures could impact Woolworths' revenue growth, with challenges in New Zealand and BIG W potentially affecting profitability.

Catalysts

Operates retail stores in Australia and New Zealand.

• Woolworths is focused on leveraging its digital platforms, increasing customer engagement, and enhancing eCommerce growth, which could lead to increased revenue through digital sales and enhanced customer loyalty.
  
• The company is rebranding stores in New Zealand, aiming for improved sales through stronger brand recognition and enhanced customer value communication, positively impacting revenue potential.
  
• New supply chain improvements, including the commissioning of automated distribution centers, are expected to provide cost efficiencies and improve the EBIT margin over time.
  
• Woolworths plans to expand and optimize its BIG W segment, with emphasis on store renewals and introduction of new product lines, potentially boosting revenue and improving net margins.
  
• Strategic moves towards digital transformation, such as the rollout of more personalized digital experiences and AI adoption, aim to drive operational efficiencies and reduce costs, enhancing net margins and earnings.

Woolworths Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Woolworths Group's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.2% today to 2.6% in 3 years time.
• Analysts expect earnings to reach A$1.9 billion (and earnings per share of A$1.57) by about February 2028, up from A$108.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.3x on those 2028 earnings, down from 337.9x today. This future PE is greater than the current PE for the AU Consumer Retailing industry at 22.8x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.26%, as per the Simply Wall St company report.

Woolworths Group Future Earnings Per Share Growth

Risks

• Elevated cost of living pressures and a highly competitive market could negatively impact Woolworths Group's future revenues, as seen in the loss of sales momentum and decline in customer scores, particularly during the third quarter of FY '24.
  
• The decline in customer spending on groceries and increased cross-shopping among retailers could continue to impact overall revenue growth for Woolworths, particularly given the significant moderation in grocery inflation.
  
• Ongoing financial stress related to mortgages and rents for consumers, especially younger groups, poses a risk to Woolworths’ revenue growth as discretionary spending may remain suppressed.
  
• Challenges faced by the New Zealand Food and BIG W segments, including value-conscious customers and lower sales, could adversely affect net margins and overall group profitability if unresolved.
  
• Incremental costs associated with the commissioning and dual running of distribution centers in FY '25, alongside elevated wage inflation, might strain net margins and earnings unless offset by significant productivity improvements.

Valuation

• The analysts have a consensus price target of A$32.238 for Woolworths Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$36.7, and the most bearish reporting a price target of just A$28.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$75.1 billion, earnings will come to A$1.9 billion, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of A$29.92, the analyst price target of A$32.24 is 7.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.