B01BAVA320 - Woolworths Group Limited: A Business Analysis & Valuation

This case study provides a business analysis and valuation of Woolworths Group Limited, a leading food retail company in Australia. It includes an overview of the company's industry position, mission, goals, and strategies for FY18, along with management team highlights and product/segment information. The report uses Michael Porter’s Five Forces model to evaluate industry rivalry and considers accounting policy issues like operating leases and goodwill impairment. Financial performance and position are analyzed for FY18, compared with FY17, and a DCF methodology is applied for valuation, leading to a recommendation for prospective investors based on the stock price as of May 17, 2019. Desklib offers this and other solved assignments to aid students in their studies.

BUSINESS ANALYSIS AND VALUATION
Business Analysis and Valuation
A case on Woolworths Group Limited

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BUSINESS ANALYSIS AND VALUATION
Executive Summary
The report attempts business analysis and valuation of Woolworths Group, one of the leading
food retail companies in Australia. Based on analysis and valuation, recommendation is
provided to prospective investors.
The report starts with an overview of the company’s position in the industry along with
mission and goals pursued by the company and strategies formulated to achieve those goals
in FY18. Highlights on Management team are provided for gauging the competence of
management team. Overview of products and segment information is also provided.
The report continues with a Michael Porter’s 5 forces model analysis to evaluate the intensity
of peer rivalry prevalent in the food retail industry. The accounting policy issues of operating
leases and goodwill impairment have been considered for close monitoring in future reports.
Analysis of financial performance and financial position for FY18 and comparison with
FY17 have been done as a prerequisite for valuation purpose. DCF methodology has been
used to value the company and make recommendation based on stock price as of 17th May,
2019.

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BUSINESS ANALYSIS AND VALUATION
Table of Contents
Executive Summary...................................................................................................................2
Introduction................................................................................................................................4
Company Mission and Goal.......................................................................................................4
Managerial Highlights................................................................................................................5
Product Overview and Segment information.............................................................................6
Michael Porter’s Five Forces Model..........................................................................................7
Low threat of new entrants.....................................................................................................7
Bargaining Power of suppliers...............................................................................................7
Bargaining Power of buyers...................................................................................................7
Threat of substitutes...............................................................................................................8
Competitive Rivalry...............................................................................................................8
Accounting Policy choices to be checked..................................................................................9
Evaluating Financial Performance...........................................................................................10
Evaluating Financial Position..................................................................................................11
Recommendation to Investors..................................................................................................13
Conclusion...............................................................................................................................14
References................................................................................................................................15

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BUSINESS ANALYSIS AND VALUATION
Introduction
Established in 1924, Woolworths Group Limited (ASX: WOW) is a renowned name in the
Australian food and staples retailing sector (ASX, 2019). As of FY18 end, the company has a
network of 3,240 stores across Australia and New Zealand with revenue grossing A$56
billion (Woolworths, 2018). The company serves more than 29 million customers per week
with the help of a team of 201k employees and has strong alliance with several local farmers
and manufacturers. Woolworths is a leading player in the Australian grocery retailing sector
with a sizeable market share of around 34%.
Figure 1
Company Mission and Goal
Woolworths’ mission is to “deliver the best in convenience, value and quality for our
customers” (Woolworths, 2019). Leadership is pursuing the goal to “have customers put the
company 1st across all brands” (Woolworths, 2019)
The company focuses on six priorities to pursue its goal.
-Building retail team which pursues an organisational culture of customer 1st and team 1st -
Success in operations is measured based on Voice of Customer (VOC), Voice of Team

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BUSINESS ANALYSIS AND VALUATION
(VOT) and Voice of Supplier (VOS). These feedbacks are regularly taken to respond to
changing preferences of stakeholders.
-Building growth platforms with connected, customised and convenient shopping experience-
Initiatives like rollout of pickups, additional customer fulfilment centres for meeting
increasing demand for online home delivery, website and app improvements, adding Rewards
card to Google or Apple wallet have added to sales growth.
-Creating differentiation in Food Customer Propositions- Store renewals and upgradations,
rebranding and updating of 5000 products, tailoring of products for local customer base,
expansion of product range through new launches were key transformations in 2018.
-Further innovations in drinks business- Tailored range for local customer base, local
sourcing, store renewals
-Unlocking potential in the portfolio through resource optimisation
-Redesign end-to-end processes to ensure valuable experience for buyers and less
complicated operations for stores- 1Store program rollout with training of team members,
Wifi upgrades, remote hand-held devices used in stores, building and automation installation
in 2018.
Managerial Highlights
Managerial team consists of:

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BUSINESS ANALYSIS AND VALUATION
-Brad Banducci- Appointed as CEO in Feb 2016, he has been with the Company since 2011
(Woolworths, 2019). Prior to joining the company, he was CEO of wine retail and production
company Cellarmasters. Previously he was associated with Tyro Payments and retail section
of Boston Consulting Group.
-Steve Donohoe- MD of Endeavour Drinks since Jan 2018, has been with the company since
19 years of age and has 24+ yrs. of experience in retail sector.
-David Marr- CFO since Feb 2014 and has been with the company since 2011. Prior to this,
he held senior roles in Tesco plc, Southcorp, Foster’s and Australian Pharmaceutical
industries.
-Claire Peters- MD of Woolworths supermarkets since June 2017. Prior to this was COO in
Tesco Thailand. Retail experience of 22+ years starting in Tesco.
-Colin Storrie- Group Portfolio Director since July 2016. He has 20+ yrs. of experience in
senior finance roles in Government organisations, investment banking and other listed
companies. He is currently independent director in UNICEF Australia, AIG Australia, and
North Queensland Airports.
Product Overview and Segment information
The company primarily operates supermarkets in Australia as Woolworths brand and in New
Zealand as Countdown brand (Disfold, 2019). Additionally, in Australia, the company also
sells liquor as BWS and Dan Murphy’s brands, operates hotel and pub business as Australian
Leisure and Hospitality group and discount department chain as Big W brand. The segment
breakup highlights its primary business activities as purchase of food products for resale in

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BUSINESS ANALYSIS AND VALUATION
Australia (Australian Food) and New Zealand (New Zealand Food) and purchase of drinks
for resale in Australia (Endeavour Drinks).
Figure 2
Michael Porter’s Five Forces Model
Michael Porter’s five forces model helps to understand the key competitive forces affecting
an industry. An analysis of the five forces that determine the level of competitive intensity in
the food and staples retail industry are as follows:
Low threat of new entrants - The highly urbanised Australian economy, where around 90%
population stays in urban areas, prefers supermarkets for most of their grocery and food
products shopping as against convenience stores and local grocers (Mordor Intelligence,
2019). The established players command c80% of the market share and enjoy economies of
scale and stronger buying power as against suppliers (Crothers, 2017). New entrants need
huge investments for maintaining an effective distribution channel (creating supermarkets or
convenience stores preferred by customers), matching the marketing budgets of existing
players to lure customers, providing wide range of products for gaining customer loyalty, and
withstanding the intense price competition maintained by big players. Woolworths faces
competition from big players entering the market (Sotiropoulos, 2018). The company can

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BUSINESS ANALYSIS AND VALUATION
safeguard its market share through innovation in product lines to combat pricing pressures,
differentiation through more private labels, development of the online grocery retail platform.
Bargaining Power of suppliers is low- The industry being highly concentrated with few
players commanding through big supermarkets and convenience stores (Crothers, 2017).
There are several local farmers and manufacturers supplying the industry. The market players
have low switching costs, hence bargaining power of suppliers is low providing room for
bigger players to maintain procurement costs at competitive levels.
Bargaining Power of buyers is high- The Australian economy has been growing at an
appreciative rate and net adjusted disposable income per capita remains above the OECD
average (OECD, 2019). The buyers enjoy low switching costs, hence customer loyalty is
dependent on competitive pricing, level of differentiation, range of products in shelf,
additional services and technological adoption of the market players. The explosive growth of
Aldi signifies the indifference between Australian made products and imports (Crothers,
2017). Grocery buyers are more concerned with food safety standards, market proximity,
good value, convenience in shopping time and hygiene in food preparation. The above
preferences have increased the popularity of organic products, online retail, expansion of
quality private-label product ranges vis-à-vis branded products. Convenience stores are
facing competition from supermarkets due to high prices and limited product ranges forcing
the stores to focus more on maintenance of fresh food supplies and increased range of
services. Small grocers are facing a decline in growth in value terms.
Threat of substitutes is low- There obviously are no substitutes for grocery products and
staples since these fall in “necessity” category (Birck, 2013). However, the aging population

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BUSINESS ANALYSIS AND VALUATION
is now more health conscious and aware of lifestyle issues on health like diabetes, obesity etc
(Lucio, 2018). So, preference for cooking vis-à-vis dining out is dependent on the need for a
healthy meal especially where families and children are concerned (Crothers, 2017). Further,
preference is for freshness in packaged food sales, smaller single-serve pack sizes, and
organic packaged food. Online retail has been growing at a tremendous rate as against store
sales and Woolworths has been quite proactive in building its online network in anticipation
of rising preference for online grocery buying.
Competitive Rivalry- There is severe competitive rivalry due to low number of large
players. Most customers remain loyal to the big brands (Cameron, 2016). However,
disruptive pricing structure by Aldi and aggressive discounts and increase in private label
offerings by Cole (Wesfarmers) have helped these two companies to gain market share at the
expense of Woolworths (Crothers, 2017).
Accounting Policy choices to be checked
Woolworths is replacing the existing accounting requirement for leases under AASB 117
with AASB 16 with retrospective effect from 1 July 2019 (Woolworths, 2018). Under
existing requirements, leases cannot be classified based on their nature as capital or operating
leases and operating leases remain off-balance sheet items. Under new standard, operating
leases would have to be shown in both sides of balance sheet as a right-to-use asset and
present value of future lease payments as liability. Auditors and analysts will have to check
that the company uses this approach in the future financial reports and verify the interest
expense and depreciation shown in income statement as well against operating leases. This
transition would enhance the quality of financial reporting for the company since the
treatment of operating lease would be equivalent to borrowing from the market providing a

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BUSINESS ANALYSIS AND VALUATION
fairer view of the financial leverage (Trainer, 2018). As of now, the company has
considerable amount of property lease as operating lease. This treatment will also provide a
better picture for calculation of cost of debt for valuation purpose.
Among intangible assets, a significant amount represents Goodwill from acquisitions ($4,260
million) (Woolworths, 2018). The company has disclosed about testing for impairment at
least annually if circumstances warrant for goodwill impairment. Auditors and analysts
should closely watch the treatment of goodwill in the company’s financial reports to ensure
that impairment tests have been fairly done when required. In case there is a requirement but
goodwill is not impaired, the book value of equity would stay elevated and not provide a fair
picture (CFI, 2019).
Evaluating Financial Performance
Consolidated Profit and Loss Statement of Woolworths
(Year ending 24th June, 2018)
Financial Performance (A$ million) FY17 FY18 % change
Operating Revenue 55034 56965 3.51%
Cost of Sales -39105 -40256 2.94%
Gross Profit 15929 16709 4.90%
Other revenue 244 222 -9.02%
Branch expenses -10671 -10854 1.71%
Administrative expenses -3176 -3529 11.11%
EBIT 2326 2548 9.54%
Financing Cost -194 -154 -20.62%
PBT 2132 2394 12.29%
Income tax expense -651 -718 10.29%
PAT from continuing operations 1481 1676 13.17%
Profit from discontinued operations 112 119
PAT for the period 1593 1795 12.68%
Figure 3

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BUSINESS ANALYSIS AND VALUATION
Ratio Analysis FY17 FY18
Gross Profit Margin 28.9% 29.3%
Operating Profit Margin 4.2% 4.5%
Net profit Margin 2.7% 2.9%
Figure 4
The operating revenue of the company witnessed 3.5% increase during FY18 driven by 4.4%
growth in the Australian food segment and 4.5% growth in the Endeavour Drinks segment
probably because of tailoring of products to suit local preferences, competitive pricing and
portfolio additions. However, the miserable performance of the New Zealand food and Big W
segments dragged the sales figures. Gross profit margins posted increase of 0.4% signifying
lower cost probably due to higher local sourcing. The company experienced operating
efficiencies during the year with much lower increase in branch expenses compared to sales
growth probably due to increased automation efforts. Margin improvement was majorly
witnessed in Australian Food segment ( 4.7% margin in 2018 vs 4.4% in 2017) As a result,
EBIT increased by 9.54%, higher than increment in gross profit of 4.9%. As a result
operating profit margin went up by 0.3% to 4.5%. There was a fall in financing cost due to
net repayment of borrowings during the year signifying reduction in financial leverage. Net
profit margins improved by 0.2% to 2.9%.

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BUSINESS ANALYSIS AND VALUATION
Evaluating Financial Position
Consolidated Balance Sheet of Woolworths
(As of 24th June, 2018)
Figure 5
Figure 6
Figure 7