Woolworths Spends $959 Billion for the Future

All companies want to improve revenues. More sales give businesses the opportunity to translate it into higher profits. So all businesses place an emphasis on trying to increase revenues.

Yet there are many different ways to improve revenues and financial performance. But not all avenues to boost sales are deemed as the ‘right way’ for businesses. A couple of different ways to improve sales could be to either increase the number of customers, the average transaction size, or the prices at which goods are sold.

However, capitalising on the variables above, other than increasing prices, is harder than you think. It’s all well and good that you want to have more customers, but how do you get them? Marketing strategies and promotions need to be thought out and planned. It costs to acquire customers.

A much simpler way to increase revenues is to simply cut the fat. If there is an underperforming businesses segment, a simple way to increase revenues is to cut it.

This action can be done almost immediately. And it’s a strategy that a company has complete control over.

This is exactly what Woolworths [ASX:WOW] is doing as part of their operational model review.

This morning, WOW released an update to their Operating Model Review. Brad Banducci, CEO of WOW, said the turnaround of the business has shown real momentum.

Five months ago I said we would work hard to get customers to put us 1st, to improve our culture and rebuild momentum,’ he said.

However, what might not improve culture, at face value, is that WOW plans to cut 500 jobs. The cost of these layoffs will total $35 million. And, along with 500 employee redundancies, 30 stores will also be closed.

A further 1,000 team members will be moved from the Groups offices into their stores. Banducci’s plan is to ‘improve accountability and help us better support our store teams and customers.

WOW is also planning to separate Big W and EziBuy completely. And they will explore options to possibly sell the EziBuy business.

But this shouldn’t be seen as the evil corporation cutting jobs. Rather, it should be viewed as a business restructuring to be successful. Why keep underperforming employees, stores and divisions on the balance sheet?

WOW is not running a charity; they are running a business. Their end goal is shareholder value. The Group plans to spend $959 million in total restructuring costs. And the signs of a ‘turnaround’ have caused shares to climb more than 7% in today’s trading.

WOW Woolworths share price jumps

Source: Google Finance

Spending now to enjoy more later

At the start of this year, WOW shareholders knew something needed to change. The board did too. That’s why they appointed Brad Banducci as CEO. No one expected a miraculous change right away. But, as Banducci said, five months into the job, the Group is already showing signs of improvement.

The main focus is still fixing the main problems within the retailing giant: underperforming businesses and stores. So before WOW moves forward, they need to get things right. Hopefully their spending and efforts will benefit shareholders in the future.

The Group is currently in the process of finalising their FY16 results to be reported on 25 August. Earnings before interest and tax (EBIT) before significant items is estimated to be in the range of $2.55–$2.57 billion.

The above range represents a 22–23% drop from 2015 figures. But it might be too soon to count WOW out just yet. WOW will continue to cut what isn’t working, while strengthening what is working. Banducci summarises:

While we have a long way to go, in Supermarkets our strategy to get customers to put us 1st through our investment in prices, quality, service and customer experience is translating into improving Voice of the Customer Scores (75 at end of June), transaction and item growth, and strong early results from our trial culture is changing, with Team engagement up 3 points at the end of June.

More positive signs will likely prompt other investors to jump into WOW. Year-to-date shares haven’t been in positive territory. Shares have been sold by investors due to WOW’s many troubles. But if this situation was to turn around, like it somewhat has, then $24 for a Woolies share could be cheap.

But while shares have climbed significantly throughout this month, investors need to be careful. In May, the share price showed signs of improving. However, it appeared to be nothing special as they traded down to a 2016-low of $20.50.

But if financial results are in line with expectations, WOW shares could continue to recover.

Härje Ronngard,

Junior Analyst, Money Morning 

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