Woolworths (WOW) - Joining the razor gang

Woolworths operates retail stores in Australia and New Zealand. The company reported first-half earnings short of market expectations, driven by a larger-than-forecast impact from industrial action at its distribution centres, while group gross margin also narrowed due to price reinvestment to support sales growth, increased promotional expenses, and high clearance sales activity in its Big W discount department store chain.

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Guidance was downbeat, with management forecasting a fall in second-half earnings from its dominant food business despite healthy sales growth in the first seven weeks of the period. The supermarket giant appears to have seen the light, however, unveiling a plan to strip $400 million in costs out of the company. New management’s tighter focus on expenses – obviously a crucial variable in an industry characterised by thin margins and low sales growth relative to other sectors – is a very positive development, in Ord Minnett’s view.

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Given this, we have raised our profit estimates in later years. This leads us to raise our target price to $36.00 from$32.00, and to take a more constructive view on the stock given management’s targets for savings and efficiency gains.

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