Acquisition Of Absolute Pets And Investments In FBH Will Drive Future Operational Efficiencies

Key Takeaways

• Strategic acquisitions and investments in the pet care and Foods sectors are expected to enhance market share, revenue, and margins for Woolworths Holdings.
  
• Focused business transformations and strategic separations are anticipated to unlock long-term growth and improve operational efficiency, boosting future earnings potential.
  
• Challenging macroeconomic conditions and strategic investments may impact Woolworths' profitability, with competitive pressures and high inflation further threatening revenue and margins.

Catalysts

Through its subsidiaries, operates a chain of retail stores in South Africa, Australia, and New Zealand.

• The acquisition of Absolute Pets, a market-leading business in a fast-growing category, is expected to drive margin and earnings growth, positioning Woolworths Holdings to expand its market share in the pet care industry. This is likely to positively impact revenue and net margins.
  
• Woolworths’ ongoing investment in its Fashion, Beauty, and Home (FBH) business through initiatives like the value chain transformation, new store formats, and online growth is expected to drive operating efficiency and improve product availability, enhancing trading density and contributing to future revenue and margin improvements.
  
• The separation from David Jones positions the Country Road Group for optimized growth by allowing a focus on resetting its structural economics. This strategic shift, while moderating immediate margin expectations, is anticipated to unlock long-term profitable growth and enhance earnings.
  
• Expansion in the Foods sector, particularly through differentiated value propositions like the next-generation store formats and the Woolies Dash online platform, positions the company for sustained revenue growth and improved customer acquisition and retention, thereby supporting future topline and earnings growth.
  
• The continued investment in strategic initiatives such as the Midrand Distribution Center expansion and value chain transformation is expected to drive operational efficiencies and support enhanced profitability and cash flow generation in the medium to long term, positively affecting earnings and return on capital employed.

Woolworths Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Woolworths Holdings's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.8% today to 4.6% in 3 years time.
• Analysts expect earnings to reach ZAR 4.5 billion (and earnings per share of ZAR 4.62) by about July 2028, up from ZAR 3.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.7x on those 2028 earnings, up from 15.1x today. This future PE is greater than the current PE for the ZA Multiline Retail industry at 12.2x.
• Analysts expect the number of shares outstanding to decline by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.37%, as per the Simply Wall St company report.

Woolworths Holdings Future Earnings Per Share Growth

Risks

• The challenging macroeconomic environment, particularly in Australia, has significantly impacted consumer confidence and spending, leading to a decrease in foot traffic and sales, which could hinder future revenue growth for Woolworths Holdings.
  
• The separation from David Jones and the associated cost synergies have exerted pressure on operational leverage, negatively affecting the Country Road Group's performance and overall EBIT margins, highlighting risks to earnings.
  
• Woolworths Holdings' investment phase, with heavy spending on strategic initiatives and acquisitions like Absolute Pets, may result in short-term profitability and return on capital dilution, posing a risk to net margins.
  
• Competitive pressures, including challenges from international online retailers in the South African market, may impact the group's fashion sales, affecting revenue growth and maintaining margins.
  
• Unforeseen macro factors, such as prolonged high inflation and interest rates in key markets, could put further pressure on consumer spending, affecting Woolworths Holdings' revenue and profit projections.

Valuation

• The analysts have a consensus price target of ZAR59.0 for Woolworths Holdings 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 ZAR69.0, and the most bearish reporting a price target of just ZAR50.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR95.8 billion, earnings will come to ZAR4.5 billion, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 21.4%.
• Given the current share price of ZAR49.69, the analyst price target of ZAR59.0 is 15.8% 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.