Woolworths Company Limited - Example

ANALYSIS of WOOLWORTHS COMPANY LIMITED AUSTRALIA by: Presented to: Course/ Class: University: City and state: 1. Due date:Introduction Company Background Woolworths Company limited is a major retailer in Australian Food Retailers and Wholesale industry. Apart from running BIGW discount department stores, the retailer operates consumer electronics stores, petrol, and hotel businesses. Dick Smith, Powerhouse, and Tandy are channels through which Woolworths markets its consumer electronics. To be able to market petrol, Woolworth has formed an alliance with Caltex. It is important to note that, Woolworths conducts its retail business in New Zealand, Australia, India, and Hong Kong. Woolworths has been successful and consistent owing to strategies deployed. The two critical strategies are “Fresh Food People” and “Everyday Low Prices” (Woolworths Limited, 2012). The strategies have played an indispensible role in saving the cost of doing business such that the company achieved Cost-of-Doing Business to Sales ratio of 20%. It is also apparent that Woolworths will achieve further cost saving measures as the company switch to none-food business in addition to rationalizing regional and national distribution centres. Economic Outlook According to Gregerson (2012), Woolworth realised rising profits that were driven by low prices paid to suppliers. This strategy of low supplier prices culminated into increased profits, cash flows, and buybacks. During this period, returns to shareholders were substantially high compared with market averages. Nonetheless, as the retail and economic environment become increasingly tough coupled with the return of Coles, there is bound to be a reduced performance by Woolworths. Gregerson (para. 3) noted that Woolworth’s increases in profitability have reduced which can be attributed to recovery of Coles. To deal with this changing market situation, Woolworths have reconsidered revitalising groceries categories. The other strategy deployed by the retailer is use of a short supply chain within fresh produce section to improve quality and profit margins while reducing margins. Improving store design and layout with a view of expanding selling space is also part of Woolworth’s strategy. The retailer is further considering the positive results that can be realized from online multi option shopping and Project Quantum. Lannin (2009) affirmed improvement in Woolworth profitability despite global financial crisis. This performance was attributed to Federal government’s stimulus package. It therefore demonstrates that Woolworths is able to realize returns despite adverse economic environment. Concisely, earnings from supermarkets and pubs were high but the electronics division was adversely affected by global economic downturn. Given the institutional stability, government, and Australia’s low debt, there is a possibility that Woolworths Limited will perform well both in the short and medium term. Industry Overview and Issues In a statement by Master Growers Australia, Coles and Woolworths are the major players in Australian Retail industry. These two outlets have saturated the market with numerous supermarkets consequently locking out potential competition. It is crucial to note that Coles and Woolworth have not only continued to open new supermarkets, their sizes are also immense. This large size coupled with increased number of retail outlets acts as a disincentive for small retailers to succeed. An example is Foodworks Supermarket Toowoomba, which is operating in an environment where Coles and Woolworth’s supermarkets, pubs, discount outlets, and petrol stations are ruling the market. There is no doubt that this observation hampers true competition, reduces consumer choice, and is a risk to diversity in retail industry. Retail industry in Australia is a major contributor to GDP and employment in the country. On the other hand, the industry faces numerous challenges. One of these challenges is sales, which has been slow owing to short-term factors such as change in consumer buying habits. Instead of allocating more funds to purchase of retail goods, consumers are diverting more of their funds to rent, education, and investment. In the same vein, increases in interest rates have reduced disposable income. This automatically affects sales level in retail industry. Secondly, the entry of overseas brands such as GAP, Coatco, Zara, and banana republic, into Australian market presents risks to local retailers in term of sales (Olde, 2011). However, this competition from foreign companies has been reduced by the difference in seasons i.e. North and South hemisphere. High cost of doing business in Australia has further affected performance of retail sector. As an example, Westfield’s Pitt Street Mall in Sydney is classified as the most expensive business location in the world. Apart from high cost of rent, retail industry faces high staff costs. 2. Company Analysis SWOT Analysis SWOT analysis examines strengths and weaknesses faced by Woolworth Company limited. To begin with, Woolworth’s strength lies in its strong financial position. According to 2010 financial report, Woolworth registered a Net Profit before Tax of $2,020.8 million (Thomson ONE, 2012). The company’s profits are attributed to sales increases following reduced shelf prices. These low prices are like dividends given to customers for their loyalty. Secondly, Woolworth’s strength lies in strong core business. The 2010 Annual Report indicates that Woolworth performed well in supermarket business. Additionally, Liquor and BIGW reported good performance. Even though consumer electronics and petrol business did not register good performance, hotel business was a success. Wider product range and excellent supply chain are attributes that grants Woolworths strength in the market. Moreover, Woolworths is a market leader whose brand is well known amongst consumers. Coles and Woolworth are market leaders sharing about 70% of the market. Despite the aforementioned strengths, Woolworth faces a number of weaknesses. Rising operating cost that results from the nature of Woolworth as a large business investment grants the company strength. Secondly, low petrol margins present a weakness for the company. Specifically, Woolworth reported reduced petrol sales in the year ended 2010. Other factors accounting for Woolworth weakness are increase in debt level and high overall cost. In the external environment, Woolworth is exposed to many opportunities starting with company’s ability to expand market share and increase customer base. Opportunities not only exist locally, but also in international market especially the emerging economies of Indonesia, India, China, Hong Kong, Russia, and Brazil. Similarly, Woolworth can increase customer base by investing in online business given that the current trend is towards online purchase of goods. The use of ICT is an opportunity for Woolworth to cut their costs and explore new sales openings. An opportunity also exists in health food sector as customers become sensitive on the kinds of food consumed. The final element when carrying out SWOT analysis is threats. Slow growth and poor performance of Australian economy threatens Woolworths. Secondly, the rising cases of alcohol-related illness places pressure on Woolworths liquor business. The government has been on the lead regulating liquor business simply because of social concerns. Moreover, fast advancement in technology and the growing strength of suppliers threatens retail business, specifically, Woolworths. Company performance To analyse performance of Woolworths, it is necessary to consider financial ratios in 2011 and 2010. This will give an outlook of how the retailer is performing. The following financial ratios are therefore relevant for analysis of Woolworth’s company performance. Ratio 2010 2011 Analysis Profitability Operating Profit Margin 5.46% 5.38% Operating profits illustrates how much Woolworths makes on each sale. It is apparent that Woolworth is not progressing well given that operating profit decreased from 5.46% in 2010 to 5.38% in 2011. Return on Total Equity 28.10 28.01 This ratio compares net income to shareholder equity. It therefore demonstrates what shareholders have earned by investing in the company. The ratio decreased by 0.09 thus management was not been efficient in utilising equity for the benefit of consumer. Return on Assets 12.64 12.10 Return on invest is a measure of company profitability. The ratio decreased from 12.64 in 2010 to 12.10 in 2011. The management failed to employ company’s assets efficiently in making profits. Liquidity Current Ratio 0.7954 0.84 The ratio increased from 0.7954 in 2010 to 0.84 in 2011. This shows that the ability of Woolworth to pay its debts has increased over the last 12 months. The company therefore has short-term financial strength. Leverage Total Debt / Equity 46.79 63.81 This ratio compares total liabilities against shareholders equity. It indicates how much suppliers and creditors have committed to the company against what shareholders have committed. Comparison of 2010 against 2011 ratios shows an increment in 2011. This reveals that Woolworth’s equity position is weakening. Comparison of Woolworths Company Limited with Competitor such as Home Depot Inc is as follows. Ratio WOW-AU Home depot Inc Comparison Profitability Return on Assets 12.10 10.61 Comparing the ratios in Woolworths against Home depot, Home Depot Inc has a low returns on assets compared with Woolworths. Employment of company’s asset was not efficient in Home Depot Inc. Operating Profit Margin 5.38 9.46 Operating profits is high in Home Depot Inc compared with Woolworths. This is shown by high ratios in Woolworths. Asset Utilization Inventory turnover 10.96 4.39 This shows how fast company stock is sold and replaced. Woolworths is able to turnover its stock very fast in comparison with Home Depot Inc. Leverage Total Debt to Equity Ratio 63.81 8.68 Debt/equity ratio is low in Home Depot Inc. Its equity position is therefore strong compared with that of Woolworths Liquidity Ratios Current ratio 0.8 1.55 Home Depot Inc is in a better position to pay its short-term debts. This is confirmed by the current ratio of 1.55 against 0.8. Quick Ratio 0.31 0.34 Using the liquid assets, Home Depot Inc can easily meet short-term obligations. Market Value Ratios Current Price Earnings Ratio 16.29 22.90 Home Depot Inc is experiencing a higher P/E ratio. This implies that investors in Home Depot Inc are paying more for each unit of net income. Comparing with Woolworth, stock is expensive in Home Depot. The analysis summarised on Thomson One Banker provides an in-depth understanding of Woolworth Company and the entire industry. Through the ratios, an analyst is able to understand how the company is fairing and eventually make critical decisions. Concisely, ratios summarises the company consequently saving on time. It is essential to note further that financial ratios provide a channel through which businesses are compared. At the same time, financial goals can be checked against financial rations to make decision on what can be done in the future. The ratios are also deployed in forecasting where a company is able to examine available funds and the possibility for expansion. Finally, ratios help investors to decide on productive ventures. As an example, Woolworth has been compared with Home Depot Inc with an intention of revealing company that is making good progress and is under efficient management. 3. Summary This paper began by giving an overview of Woolworths Company Australia then proceeded to discuss company’s business operation in the economic environment of Australia. Apparently, the company registered success despite economic difficulties experienced in Australia. Petrol and consumer electronics were the only line business, which recorded low returns. Nonetheless, other areas of Woolworth’s business reported increased sales. This is a clear indication that Woolworths is able to run efficiently even during economic difficulties and in an environment of rising competition. In terms of returns to equity, the ratio narrowed down by 0.09 from 28.10 in 2010 to 28.01 in 2011. This shows that returns to an investor are stable at a ratio of 28 hence Woolworths is a good investment target. References Australian Securities 2012, “Exchange Woolworths Limited, WOW”, ASX Limited, viewed 21 August 2012, < http://www.asx.com.au/asx/research+631+/companyInfo.do?by=asxCode&asxCod e=WOW>. Gregerson, B 2012, “Will the New Woolworths Strategy Deliver Growth?” Private Portfolio Managers, June, viewed 21 August 2012, . Lannin S 2009, “Woolworths profit defies downturn” abc.net, 27 August, viewed 21 August 2012, . Olde, Q, Peter, A, and Holtzer, M 2011, Australia’s Retail Challenge: Ten Issues Facing Australian Retail in 2011. taylorwoodings 08 April, viewed 21 August 2012, . Thomson ONE 2012, “Woolworths Limited,” Thomson Financials, Viewed 21 August 2012, http://banker.thomsonib.com/. Woolworths Limited 2012, Who We Are, Woolworths limited, viewed 21 August 2012, http://www.woolworthslimited.com.au/page/Who_We_Are/ Read More