Principles of Financial Markets: Retail Industry Analysis Report

This report provides a comprehensive financial analysis of the Australian retail industry, employing both top-down and bottom-up approaches to evaluate market dynamics and company-specific performance. The analysis begins with an examination of the Australian macro-economic environment, including GDP, interest rates, inflation, and the value of the Australian dollar, to assess the overall health and potential of the retail sector. Subsequently, the report delves into a bottom-up analysis of two key players in the Australian retail market: Wesfarmers and Woolworths. This involves a detailed examination of their financial statements, including the calculation and interpretation of key ratios such as liquidity, solvency, profitability, and market performance indicators. The financial data from 2016 and 2017 is used to assess each company's performance and draw conclusions about the retail industry's overall health and prospects, offering insights into the factors influencing share prices and investment decisions. The report concludes with recommendations based on the financial analysis.

Principals of Financial Markets
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Executive Summary
Analysis of industry performance is always the major concern as there is no particular
information available at one place. Industry analysis can be better conducted through top down
and bottom up analysis. In this report top down and bottom up analysis has been conducted of
retail industry of Australia.
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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Top-Down Analysis.........................................................................................................................4
Australian Macro-Economic Environment..................................................................................4
Bottom up Analysis of the Retail Industry (Wesfarmers and Woolworth).....................................8
Detail Analysis of ratio calculation of both the companies...........................................................14
Liquidity or Solvency Analysis..................................................................................................14
Capital Structure Analysis.........................................................................................................15
Profitability analysis..................................................................................................................16
Market Performance analysis.....................................................................................................17
Conclusion and Recommendation.................................................................................................17
References......................................................................................................................................19
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Introduction
The technique of fundamental analysis proves to be highly essential for investors in
determining the intrinsic stock value of different business entities. This helps them to make
accurate decisions regarding their investment in particular stocks of companies. This report has
been developed for carrying out fundamental analysis of an Australian industry with the
selection of two ASX listed companies operating within the same industry. The fundamental
analysis is carried out through conducting top-down and bottom-up analysis of the selected
industry. The industry selected for the purpose is retail industry of Australia with the selection of
Wesfarmers and Woolworths as the major companies operating within the sector. The
fundamental analysis is conducted for evaluating the factors that influences the share price of the
companies operating within the retail industry of Australia. The factors analysis consists of
evaluating the micro and macroeconomic characteristics impacting the performance of the
industry and the selected ASX listed firms within the sector.
Top-Down Analysis
The top-down approach under fundamental analysis consists of analyzing primarily the
macro-economic trends in a selected market. This involves a general evaluation of the macro-
economic factors such as Gross Domestic Product (GDP), interest rate, rate of inflation, foreign
exchange rate and trade movements of a selected economy. This is followed by predicting the
performance of an industry on the basis of macro-economic evaluation. The industry that will
provide larger returns in the existing macro-economic environment is selected through the use of
top-down analysis. At last, the top-down investors analyses the company’s performance within
selected industry for adding their stock to their portfolios. The companies are selected ion the
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basis of the evaluation of the macro-economic factors by predicting which companies will
perform best under the present economic environment (Krantz, 2016). As such, the top-down
analysis primarily will analyse the Austrian economic environment for assessing the future if
retail companies through analyzing its macro-economic policies.
Australian Macro-Economic Environment
The economy of Australia is presently regarded to be in developing phase owing to its
strong macro-economic policies. The standard of living is higher in the country with its strong
economic policies adopted by the Reserve Bank of Australia (RBA). The economy if Australia
has recovered almost completely from the crisis of global financial with major of the developed
economies is still not able to recover from its after-effects. This suggests that strong economic
reforms adopted by the country’s government have helped in its recovery from the global
financial crisis. The country is regarded to be one of the wealthiest nations with total worth of
about AUD $ 8.9 trillion and having a GDP of AUD $ 1.69 trillion as of the end of the year 2017
(Bagshaw, 2017). The GDP rate of the country has increased by about 0.3 per cent in the last
three months supported by an increase in household spending. The GDP rate of the country is
expected to increase in future with positive business environment and increased foreign
investment. The strong GDP of the country further supports its plan of business expansion with
realization of 0.8 per cent increase in its overall economy as indicated by the Bureau of Statistics.
This is largely attributed to the large-scale expenditure of the consumers on food, clothing and
household items (Janda and Letss, 2017).
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Source: http://www.smh.com.au/business/the-economy/gdp-australia-grabs-record-for-longest-
time-without-a-recession-20170606-gwm0o2.html
The RBA has currently maintained a low interest rate of about 1.5 per cent as compared
to its past years. This has been done to support the economic growth of the country through
attracting foreign students by providing them cheap loan facilities and increasing the export
demand of products. However, the RBA is currently emphasizing on increasing the interest rates
as it is leading to rise in the price of houses and contributing to mortgage lending (Chau, 2017).
The RBA will maintain cash rates to be lower till the economic growth will remain the transition
phase until the US rates matches the Australian level. The narrowing difference between the
interest rates of Australia and US will cause the RBA to increase its interest rate in the coming
period for preventing the occurrence of housing bubble. The value of Australian dollar (AUD) is
rising and falling every day in relation to the value of other currencies. The current value of
AUD is reported to be 80.28 US cents recording an increase of about 4.15% in its value for the
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first time in last two years. The AUD has maintained an average value of US$0.75 indicating that
$1AUD is worth of US$0.75 (What makes the Australian dollar move, 2017).
Source: https://www.cromwell.com.au/insights/news/the-2017-australian-economic-outlook
The RBA has also reported a decrease in its inflation rate worth reaching to its expected
value of 2-3 per cent. The consumer price index in the country as of year 2017 is recorded to be
about 109.4 as per the Bureau of Statistics. The RBA has achieved its annual rate below its
determined target of maintaining it between 2-3 per cent. The increase in the consumer prices by
about 0.2 per cent has resulted in reducing its inflation rate to 1.9 per cent (The 2017 Australian
Economic Outlook, 2017).
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Source: http://www.in2013dollars.com/Australia-inflation-rate-in-2017
As such, the strong economic growth of the country largely supports its industry
expansion. The increase in consumer spending a supported by increase in the GDP rate of the
country provides positive sign for retail expansion. The expenditure of consumers on items such
as food, clothing and other household product has shown an upward trend with their good
standard of living. This provides a positive sign for retail growth in the country and the industry
has recorded an increase in 3% in its present value as of the year 2016. The advent of internet
retailing is also contributing largely to the large-scale development of the retail sector that
provides convenient channels for consumers to purchase the products online in relatively short
span of time from anywhere. The grocery retailers have also expenses a positive growth in the
recent years with the increase in per capita income of the country’s population group
(Hajkowicz, 2015).
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Source: https://tradingeconomics.com/australia/retail-sales-annual
The retail sector of Australia is expected to record an increase of its CAGR value by
about 3% in the future period. The growth will largely be driven by the increase in consumer
spending, internet retailing and the development of innovative technologies. The Wesfarmers is
regarded to be largest retailer in the country followed by Woolworths. The strong performance of
Wesfarmers in the retail sector of the country is mainly due to its production of home and garden
specialist products and providing online service to the customers. However, Woolworths have
diversified itself in number of business segments apart from food retailing such as liquor, petrol
stations and having gaming machines at pubs and restaurants. However, the company has
maintained its strong position in providing fresh food to people and ahs thus developed a strong
brand image in the retail market of Australia (Pink, 2008).
Bottom up Analysis of the Retail Industry (Wesfarmers and Woolworth)
Bottom up analysis is carried from the investor’s point of view and in this analysis the
focus is on the individual stocks rather than whole industry. Through analyzing the performance
of the individual companies, an attempt is made to make opinion on the industry as a whole. The
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two companies selected from the retail sector of Australia are Wesfarmers and Woolworth. Ratio
analysis has been conducted for years 2016 and 2017 to evaluate the financial performance of the
selected companies and conclusion with recommendation is drawn to interpret the performance
of the retail industry in Australia (Bull, 2007).
Financial data extracted from the annual reports of both the companies are given below. Only
that financial data is shown that is important for calculation of ratios.
Financial Data of Wesfarmers (Amount in Million Dollar)
Particulars 2016 2017
Net Profit
$
407.00
$
2,873.00
Total Assets
$
40,783.00
$
40,115.00
Net Revenue
$
65,512.00
$
68,015.00
Current Assets
$
9,684.00
$
9,667.00
Current Liabilities
$
10,424.00
$
10,417.00
Inventory
$
6,260.00
$
6,530.00
Prepaid Expenses
$
835.00
$
-
Quick Assets $ $
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2,589.00 3,137.00
Total Debts
$
7,410.00
$
5,757.00
Shareholder's Equity
$
22,949.00
$
23,941.00
Profit attributable for
shareholders
$
407.00
$
2,873.00
Earnings Per Share
$
0.18
$
1.27
Number of Equity Shares in
million 2246.00 2260.00
Payout Ratio in % 80.30% 368.90%
(Annual Report 2017 and 2016, Wesfarmers and Woolworth)
Financial Data of Woolworth (Amount in Million Dollar)
Particulars 2016 2017
Net Profit
$
(1,235.00)
$
1,534.00
Total Assets
$
23,502.00
$
22,916.00
Net Revenue
$
58,276.00
$
55,669.00
Current Assets
$
7,427.00
$
6,994.00
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Current Liabilities
$
8,993.00
$
8,824.00
Inventory
$
4,559.00
$
4,080.00
Prepaid Expenses
$
330.00
$
334.00
Quick Assets
$
2,538.00
$
2,580.00
Total Debts
$
6,039.00
$
4,566.00
Shareholder's Equity
$
8,471.00
$
9,526.00
Profit attributable for
shareholders
$
(1,235.00)
$
1,534.00
Earnings Per Share (in dollar)
$
(0.98)
$
1.19
Number of Equity Shares in
million 1264.00 1288.00
Payout Ratio in % 0.00% 53.30%
(Annual Report 2017 and 2016, Wesfarmers and Woolworth)
Ratio Calculations
Particulars 2016 2017
Profitability Analysis
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