THE DISTILLERY: Woolworths wedge

The commentariat questions Woolworths' massive capex compared with its sales result, and it seems Dulux's last-ditch attempt for Alesco is unlikely to be a winner.

It's a sign of the times when Woolworths is able to present a tiny bump in quarterly sales as a credible result, but the retail giant's latest figures have been cautiously welcomed by the commentariat. While some jotters are concerned that growth in company spending is outpacing the rate that new money is flowing into the tills, another points out that it's perception, rather than performance, which matters most to investors right now. Meanwhile, DuluxGroup's increased bid for Alesco gets a tired thumbs down, and there are new fears that the mining boom is quickly coming to an end.

But first, The Australian's John Durie relays questions about the effectiveness of Woolworths' recent investment binge.

"Merrill Lynch's David Errington … questioned the returns on $6 billion in capital expenditure when supermarket sales increased by just $43 million last year. One of the problems is the lack of clarity in the figures because on the surface liquor sales increased by 12 per cent to $6.6 billion, supermarket sales by 2 per cent and space by 5 per cent. Those numbers certainly don't point to a rapid improvement in supermarket sales but O'Brien says the figures are confusing because the liquor figures also include bar takings, which he noted were doing well."

Fairfax's Adele Ferguson also attempts to put Woolworths' sales growth into context.

"From a productivity basis, the supermarket empire's Australian food and liquor business fell to sales of $16,194 per square metre compared with $16,424 per square metre in the previous year. O'Brien disagreed with the argument, saying that if the 38 new supermarkets were backed out, then sales per square metre rose. He also believed it was too difficult to back out liquor from the food business given the liquor figures included a full-year contribution from the $340 million Cellarmasters wine club acquisition. But he wouldn't disclose the contribution from Cellarmasters."

However, The Australian Financial Review's Chanticleer columnist, Tony Boyd, points out that investors seem willing to endure slower sales in exchange for the perceived safety of a market giant.

"It is a reflection of the times that Woolworths, which used to consistently deliver double-digit sales growth and double-digit earnings growth, trades at a premium to the rest of the market while delivering sales and profit growth half the level of its best. … O’Brien is fortunate that defensive stocks such as Woolworths are in demand at a time when there is uncertainty about the outlook for the rest of the market. The market perception of where value lies has helped Woolworths outperform its major competitor, Wesfarmers, which owns Coles, despite the superior performance of Coles supermarkets."

The other big story this morning is Dulux's protracted bid for Alesco, which has been lifted from $2 to $2.05 by increasing a special dividend attached to the offer. The Australian's Tim Boreham is unimpressed.

"The most compelling aspect of the paintmaker's 'best and final' revised offer for Alesco is that such utterances are legally binding, so after the August 28 bid expiry date we won't hear any more about this increasingly protracted and tedious takeover. … Given that Dulux has employed an asset (franking credits) which Alesco holders already own, the face-saving tweak is unlikely to gain traction."

In the same newspaper, Barry Fitzgerald has a good rundown of the plight of Intrepid Mining, which lost more than half its market value yesterday after it said it was pushed out its flagship Tujuh Bukit project in Indonesia by shadowy local business interests.

Meanwhile, Matt Chambers fears that the end of the resources investment boom is coming quicker than many investors expected, relaying fears that the beginning of an investment-driven volume boom could lead to a more permanent downgrade of mining stocks.

However, the picture isn't quite so bleak for Australia's growth, according to The Australian Financial Review's Jennifer Hewitt. She argues that the mining investment already underway here should shied the economy from any further slowdown in China.

Fairfax's Michael Pascoe looks forward to tomorrow's inflation data, in expectation that the core figure will drop below 2 per cent — the floor in the Reserve Bank of Australia's target range — for the first time since the Asian financial crisis in 2007. He tips a 1.8 per cent read.

And in other RBA news, The Sydney Morning Herald's economics editor, Ross Gittins, passes on a warning from the central bank's deputy governor, Philip Lowe, about the "dark side" of innovation. That is, financial innovation that distorts remuneration structures, or regulatory, tax and accounting procedures.

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