The Woolworths Company Background - Report Example

Student Name: Tutor: Title: Corporate Valuation Course: Institution: Introduction Company background Woolworths Ltd is a company which has its headquarters in Australia. It has several segments such as Australia Food and Liquor which entails in procuring Food and Liquor goods for resale to Australian customers; BIG W takes part in procuring discount general merchandise products for marketing to Australian customers; Petrol, that involves dealing in Petroleum products for selling to Australian customers; New Zealand Supermarkets that deal with procuring Food and Liquor products to sell to customers in New Zealand; it also Consumer Electronics which entails procuring of products of electronic nature for sale to customers globally, and chains of hotel that provide hospitality and leisure services that include alcohol, food, entertainment, gaming, and accommodation (Humphery, 1998, p.104). The company operates in Australia, India, Hong Kong, and New Zealand. The electronic enterprise is in charge of stores that are found in New Zealand and Australia as well as it has business ventures in partnership with TATA which is found in India and operates stores going by the brand Croma Brand. The company is in the retailing industry and it has a long history in this industry. Woolworths can be categorized as a leading wholesaler and retailer inn the world. The company projects to increase its earning per share to AUD1.93 in 2013 and AUD2.04 in 2014. The change in the estimates of the company indicates that the forecasts over the years have been very accurate as shown in the diagram below; Source: First Call AUD. The current earning per share of the company stands at AUD1.736. From the analyst rating given it can be seen that it is tending towards strong selling. Source: First Call AUD The share price as at 21st Aug 2012 was 29.480. The company’s forecast for the earning per share ratio is as shown below. The mean of the earning per share has been placed at 1.774 with the prospects of moving upwards to 1.904. Economic outlook of the company The shrinking company net income growth rate indicates loss in moment of growth and it is high time for the management to look for new ways of expanding. Competition has reduced the market share of the company to allow other competitor to have a share. It would be prudent to increase marketing and promotional campaigns to increase sales returns (Peterson & Fabozzi, 2012). The company earning per share shows the prospects of growing and moving towards strong buying of the stock in the market. The company stock will be attractive due to prospects of good performance in the future. However the company has to increase reinvestment rate in order to see expansion. The short term state of the economy may not be very favorable for the company but it is anticipated to grow in the long run. Global financial crisis had negative effects on the company growth as many people were hesitant to buy stock and invest more in the company. The diversification done by the company cushioned the company on further impact on the company. The global financial crisis has affected the growth, expansion, and profitability of the company. Europe market has been adversely affected with the world economic crisis (Ciro, 2012, p.64-69). The global economic crisis affected sales and opportunities for investment. Industry overview and issues The retailing and wholesaling industry is very competitive and many investors have engaged into this industry. The company projects to grow its earning per share to above 2.0 in the coming years but it has to deal with increased competitive nature of the industry has be dealt with. More people are investing in the retailing and wholesale industry increasing the challenge of navigating to success (Humphrey, 1998, p.36-37). There is little room for expansion and thus calling for high standards of creativity and innovation. Development of new products calls for continues investment in research and development. The industry faces the challenge of increased competition and increasing demands from the customers. International laws and regulations affect liberal trading activities. Cross-border barriers are still affecting the manner in which business is being contacted. Advancement in technology has led to the challenge of keeping pace with emerging ways of doing business as competitive remain vigilant to stay abreast. Political instability and terrorism is the new challenge that the industry has to deal with. Turbulence times expose the industry to unpredictable risk. Company Analysis SWOT analysis Strengths Woolworth Company has differentiated its operations in several segments which results into cushioning the company against risk or financial crisis. The company has Food and Liquor segment, Consumer Electronic segment, Supermarkets, hotels, and petroleum products segment. The various segments make the company to continue posting positive growth of sales despite hard economic times. Diversification of risks provides stability to Woolworth Company despite hard economic times (Siddiqui, 2006, p.623-624). The company has also increased customer loyalty due to a strong brand in the market. The brand of the company as a strong competitor in the retail and wholesale business has given it an upper hand when it comes to securing debt capital for investment. The company can easily get capital from financial institutions as compared to its competitors. Weaknesses The economic crisis limited the company expansion strategies and it has not recovered fully from the effects of the financial crisis. The company has to deal with the challenge of being competitive as well as reducing its workforce to cut down on costs in turbulent economic times. Increased labor union movement and government regulation put more pressure on the company in regard to expansion strategy and keeping within the limits of the law (Sohigian & Field, 2009, p.212). Opportunities Woolworth Company Ltd has an opportunity of expanding its operations and segments to other countries such as in Africa and Asia. There is more room for expansion to other countries. The company can also borrow more debt capital to invest in new markets. The positive growth of the earning per share can be used to attract investors who will provide more capital for financing the company. Threats The company faces the threat of increased competition from other peers in the group. Aeon Company Ltd has shown strong competition capability in regard financial performance using ratios. There are other merchandisers who are strong competitors of Woolworth and the company has to come up with new strategies each time. The turbulence in the global economy has resulted into uncertainty in the merchandising industry. Increase in the operating costs of the company is threatening the profitability of the company. Company performance using financial ratio The current assets are few as compared to current liabilities hence low current ratio. Increase in debtors and unavailability of cash to settle short term debts leads to such a situation. The current assets have to be increased while the company strives to reduce the current liabilities through settling debts immediately. Short term loans have also to be avoided. The company posted a debt to equity ratio of 63.81. This shows that Woolworth is using more debt capital to finance its operations. The debt capital has been on the rise over the years. The other players in the industry have higher debt/equity ratio. The company has also a high dividend payout as compared to its peers in the industry. The current ratio of 0.80 is very low as compared to ideal ratio of 2.0. This means the company has low liquidity and may run out of cash of financing daily operations. The quick ratio is also very low. This shows that the company still has a high amount of closing stock at the end of each financial period. The Asset turnover of the company has reduced over the years. Return on equity has maintained almost the same ratio over the past three years. The reinvestment rate of the company has remained at around 8.0 hence there is no significant growth in the reinvestment rate. The increase in earning per share can be attributed to this trend (Siddiqui, 2006, p.623-624). Net margin has increased over the past four years. The quick ratio is also low and has revolved around 0.20. Account receivable days are between five and three for the past four years which are not badly off. Inventory turnover has ranged from 10.1 to 12.04 in the past four years. This rate is good and shows how many times the inventory is turned over the financial period. Comparisons to competitors or the industry average The asset turnover ratio indicates that Woolworths is doing well as compared to its peers in the industry. The company asset turnover stood at 2.63 while asset turnover of its peers was below this figure. Asset turnover for Aeon Company Ltd was 1.37, Casino Guichard-P was 1.17, Finatis was1.10, Fonciere Euris SA was 1.10, Metro AG was 2.20, and that of Mitsubishi Corp was 0.46. The only company that came close to posting strong asset turnover was Metro AG with 2.20. This means that Woolworths is using its assets well enough to bring returns to the company (Peterson & Fabozzi, 2012). The other companies are under utilizing their assets either due to lack of financial expansion Mitsubishi Corp posted the lowest Asset Turnover ratio. This shows that it is far below Woolworths well it comes to utilizing its assets. Inventory turnover ratio for Woolworths is 10.96. Compared to its peers, Woolworth has performed well to register such a ratio. The nearest challenger is Aeon Company Ltd, which posted an inventory turnover ratio of 10.31. The other companies posted inventory turnover ratio ranging from 3.67 to 9.63. Woolworths has been able to turn its inventory more times as compared to the peers. The asset utilization ratio puts Woolworths above per as compared to its peer companies. The gross profit margin for Woolworths was 25.78. The peer companies posted also strong gross profit margins as follows: Aeon Company Ltd was 32.44, Casino Guichard-P was 24.03, Finatis was26.03, Fonciere Euris SA was 7.06, Metro AG was 21.30, and that of Mitsubishi Corp was 22.08. This shows that there is high competition in the industry when it comes to profitability ratios. Two companies, Aeon Company Ltd and Finatis, posted high profit margins as compared to Woolworths. This indicates that the companies might be encroaching on the market share of Woolworths, or they had an effective marketing or promotional campaign as compared to Woolworth. Apart from Fonciere Euris SA, the other companies pose a real threat to the growth of Woolworth in the industry (Peterson & Fabozzi, 2012). Woolworths posted sales growth rate of 15.64%. The other industry players posted sales growth rates ranging from 1.86% to 10.22%. This shows that Woolworth is positively and steadily growing over the years in terms of sales. The peers EBIT 5 Yr Compound ranges from -0.04% to 17.05%; Woolworth EBIT 5 Yr Compound is 22.39% which is above that of the peers. This shows that Woolworth is performing well and the close competitor is Aeon Company Ltd with a posting of 17.05%. The company has dominated its peers in many years (Keown, 2003, p.116). The company’s EPS 5 Yr Compound Growth was 22.59% which was below that of Aeon Company Ltd that posted EPS 5 Yr Compound Growth of 22.73%. The greatest competitor of Woolworth in the industry is Aeon Company Ltd as indicated by strong performance in the major performance ratios that have been discussed. Summary Woolworth Company has registered reducing positive growth in terms of sales growth. Despite hard economic times, the company has realized profits although in reducing portions. The company’s prospects are looking up considering the performance of the company. The earning per share has grown over the years from 0.91 in 2006 to 1.75 in 2011. This will encourage more investors to invest in the company since they are assured of good returns. Dividend returns have also grown over the year from 0.59 in 2006 to about 1.22 in 2011. This positive trend has also been reflected in sales realized. The sales have grown from AUD33.80M in 2006 to AUD44.52M in 2011. Despite the challenges experienced in the industry, Woolworth has shown positive growth. However, it should be noted that the growth in sales has reduced since 2006 from 20.35% to 4.74% in 2011. This demonstrates the increase competition and dwindling fortunes in the merchandising industry. This downward trend is exhibited in the net income growth rate, dividend per share growth rate, and operating income (Keown, 2003, p. 103). Woolworth has to expand to other countries and other industries. The growth in operating income has dropped to 3.18%, indicating the same trend that shows low liquidity in the company. The cash flows has shown that Woolworth has little to spare for operating activities and hence the low liquidity in the firm. Woolworth Company Ltd has to invest in short term projects to increase returns that will help in the daily operation of the company. The company needs to increase its operating income and reduce its long term debt in order to achieve stability. Huge debt capital and low operating cash makes it difficult for the company to execute its daily operations. Most the transactions are transacted in credit terms and hence making the company to have low liquidity level. It is good for the company to have cash for operating activities. The company has to reduce long term financing and concentrate on short term financing. References Ciro, T., 2012, The Global Financial Crisis: Triggers, Responses and Aftermath, Ashgate Publishing, Ltd, London. Humphery, K., 1998, Shelf Life: Supermarkets and the Changing Cultures of Consumption, Cambridge University Press, Cambridge. Keown, J., 2003, Foundations of Finance: The Logic and Practice of Financial Management, 清华大学出版社有限公司, Beijing. Peterson, P.P. & Fabozzi, F.J., 2012, Analysis of Financial Statements, John Wiley & Sons, London. Siddiqui, S.A., 2006, Managerial Economics And Financial Analysis, New Age International, Melbourne. Sohigian, J.R. & Field, S., 2009, Career Opportunities in the Retail and Wholesale Industry, Ferguson/Facts on File, New Delhi. Read More