Retailer Aims For $400 Million Savings Through Business Simplification By 2025

Key Takeaways

• Operational streamlining and supply chain optimization are set to enhance cost efficiency and service levels, potentially boosting net margins and earnings.
  
• Enhanced digital initiatives and expanding the Own Brand portfolio are poised to drive revenue and market share growth through improved customer engagement.
  
• Persisting with inflationary pressures and cost management challenges could erode margins and profitability, requiring measures to streamline operations and improve fiscal health.

Catalysts

Operates retail stores in Australia and New Zealand.

• Woolworths is focusing on improving operational efficiencies by simplifying their business, which is expected to lead to annualized gross savings of approximately $400 million by the end of calendar year 2025. This can potentially improve net margins and earnings if these savings are not fully reinvested.
  
• The company is optimizing its supply chain and logistics, including the ongoing transformation of their New South Wales supply chain and the automation of their distribution centers, to enhance operational efficiency and product availability. This can positively impact earnings by reducing costs and improving service levels.
  
• Woolworths is leveraging its digital presence and eCommerce growth, with innovations such as rapid order fulfillment (within two hours) and enhancements in their Everyday Rewards program. This is anticipated to drive revenue growth through increased customer engagement and sales.
  
• The growth of the Own Brand portfolio, which has shown strong sales performance, is seen as an opportunity to capture more market share and improve gross margins as these products typically carry higher margins compared to third-party brands.
  
• By focusing on adjacent businesses such as Cartology (retail media services), Everyday Rewards, and B2B food services, Woolworths expects to derive incremental revenue growth and profit contributions outside its traditional supermarket operations.

Woolworths Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Woolworths Group's revenue will grow by 3.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 2.7% in 3 years time.
• Analysts expect earnings to reach A$2.0 billion (and earnings per share of A$1.66) by about March 2028, up from A$1.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$1.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.3x on those 2028 earnings, up from 21.1x today. This future PE is greater than the current PE for the AU Consumer Retailing industry at 21.1x.
• Analysts expect the number of shares outstanding to grow 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 6.6%, as per the Simply Wall St company report.

Woolworths Group Future Earnings Per Share Growth

Risks

• Industrial action in Australian Food disrupted stock flow and impacted EBIT by approximately $95 million, potentially affecting future earnings if similar disruptions occur.
  
• With ongoing cost of living pressures, customers are displaying value-seeking behavior and cross-shopping, which could lead to reduced revenue and net margins as they opt for cheaper alternatives.
  
• Significant wage inflation and increased costs in eCommerce, including mix shift and higher depreciation, may continue to squeeze net margins despite efforts to improve productivity and efficiency.
  
• Meat input costs and broader price inflation not fully passed to consumers have pressured gross margins, and continued cost pressures could further impact profitability.
  
• The need for substantial cost savings of $400 million from simplification highlights efficiency challenges, which, if not effectively executed, could result in further margin erosion and hinder net income growth.

Valuation

• The analysts have a consensus price target of A$31.964 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$37.0, 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$76.0 billion, earnings will come to A$2.0 billion, and it would be trading on a PE ratio of 23.3x, assuming you use a discount rate of 6.6%.
• Given the current share price of A$28.17, the analyst price target of A$31.96 is 11.9% higher.
• 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.