Woolworths Posts a Net Loss of $973 Million

It was going to happen eventually. Woolworths [ASX:WOW] had to reveal results of their terrible trading period last year. But, on a positive note, the losses were in line with guidance.

Woolworths posted a net loss of $972.7 million for the first half of FY16. The biggest contributor to Woolworths’ poor performance was their home improvement division. Woolworths-owned Masters posted an earnings loss of $137.9 million.

Part owner in the Masters business, Lowe’s, has triggered an option to sell their 33.3% share to Woolworths. The transfer of shares will cost Woolworths an additional $70–80 million in restructuring costs.

Woolworths told shareholders early this year that exiting the ailing business was in process.

Woolworths will most likely try to sell off Masters, or they’ll be forced to close the struggling chain down altogether. Masters was expected to rival Wesfarmers [ASX:WES] Bunnings. Yet it seems Woolworths should stick to what it does best.

Liquor is one business that Woolworths dominates in. Dan Murphy’s, owned by Woolworths, has a commanding dominance over the market. Out of the top 10 liquor retailers, Dan Murphy’s is the clear winner. In any given week, 1.2 million Australians (26.3% of total alcohol buyers) shop at Dan Murphy’s. And each other these shoppers spends, on average, $67.

The next best retailer is BWS, also owned by Woolworths. BWS captures 17.9% of the market, spending $48 on average. You would think with Woolworths’ clear market presence that liquor earnings would be through the roof.

The reality is actually much different. Woolworths’ Australian Food, Liquor and Petrol EBIT have actually dropped. Earnings for just food and liquor have remained somewhat unchanged, increasing only 0.7%.

There are a lot of changes that need to happen. Woolworths hasn’t been able to compete with rival Wesfarmers recently. But it will hope the new CEO, Brad Banducci, can turn things around. Banducci has come into the role at what seems like the worst possible time.

However, there is an opportunity to pull one of the biggest turnarounds in Woolworths’ history. As of right now, any change may help the big retailer get back on top. Banducci previously ran Woolworths’ liquor operation.

He also took control of the food business in February, following a slump in sales and earnings. It could be said that Woolworths regards him as something of a ‘fixer’.

Woolworths’ chairman, Gordon Cairns, explains:

Brad has been at Woolworths for five years during which time he led Dan Murphy’s to become one of Australia’s great retailers. For the last 12 months he has been leading the turnaround of our supermarkets business.

There is a lot of hard work ahead of us but we are very clear on our priorities and are confident we have the leadership team to get us there.

Dividends will be fully franked, dropping 34.3% to 44 cents per share. It’s a long road ahead for Woolworths, but if shareholders trust in management they may be able to get it done. ‘We are rebuilding the Woolworths business. While we have made progress, it will be a three to five year journey and there is much to do,’ Cairns said.

A long road ahead for Woolworths, then…

Härje Ronngard,

Junior Analyst, Money Morning

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