Woolworths must prove the market wrong

The retailer’s board and management believe the company is on track, despite recent poor results. For investors, the proof will be in the pudding.

In reiterating Woolworths' earnings guidance for this financial year chairman Ralph Waters told its annual meeting that the market had drawn conclusions about the group’s outlook that its board didn’t share. Grant O’Brien’s future as Woolworths' chief executive may hinge on which is right.

Only a year ago Waters confidently asserted that Woolworths’ Masters hardware business would be profitable in 2016. In August O’Brien was forced to confirm what the market had been signalling, saying Masters’ losses had blown out again and the pledge that it would break even in 2016 had been abandoned.

Since then the losses have continued to grow and sales per Masters store have continued to deteriorate. While Waters said he was disappointed the goal of break-even by 2016 would not be achieved the group remained confident that Masters would be a material profit contributor over time.

Earlier this month Woolworths reported weaker-than-expected first-quarter sales growth, with its core food and liquor business sales growing at less than half the rate of the rival Coles business. O’Brien told shareholders today there were improving sales trends across Woolworths’ businesses, although second-quarter sales would be heavily reliant on the experience over the next six weeks.

The recommitment to the 2014-15 earnings guidance came after a board review.

While one wouldn’t expect either Waters or O’Brien to be other than optimistic about the longer-term prospects for the hardware business, in which they’ve invested and staked so much, nor to be pessimistic about the outlook for the food and liquor businesses, the confident tone of their commentaries is at odds with what has actually been happening within the group.

Grant O’Brien’s statement that Woolworths was “extending our leadership” in food and liquor was half right. There’s no dispute that Woolworths’ liquor business has become more dominant but, after gradually closing the gap in the growth rates of its supermarket sales relative to Coles through the first two years of O’Brien’s leadership, Coles this year has kicked away again.

The group also has issues within its Big W discount department store business, although that is a sector-wide issue as the sector has borne the brunt of the structural changes that have been occurring within retail.

O’Brien is a very good retailer who inherited the hardware strategy (although he was involved in developing it) as well as a supermarket business that had allowed Coles to develop real momentum that he is still trying to arrest.

Until the second half of last financial year he had significantly narrowed the gap in growth rates. He’s also introduced a new and ambitious productivity improvement program and is doing some really interesting things online and with technology and data that could generate competitive advantage.

Woolworths remains a powerful and, within its core, well-managed business.

If, however, the market is proven right and the board and management are wrong about this year’s outlook -- if the hardware losses continue to blow out and Coles continues to grow its supermarket sales at a greater rate than Woolworths -- the pressure for changes to management and strategies will mount.

In full-blown contests between boards and management and the market, the market usually prevails.

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