Financial Analysis of Woolworths Group Limited
Executive Summary
The company analyzed in this report is Woolworths Group Limited. Woolworths Group Limited operates in the retail sector of New Zealand and Australia. The company has five segments in which it reports its financials. The report shows the income statement, balance sheet, and cash flow statement analysis. Other than this, the company has also utilized the financial ratio analysis for analyzing the company performance. The results have shown that the company has improved substantially in terms of its profitability and efficient utilization of the resources. Moreover, it has also balanced its debt and equity sourcing to the level where it is not depends on either one of the sources completely. The company has strong financials to support earlier payments for the borrowings or financing which it has done in the past as well. The only concerning factor is the liquidity of its assets. Most of the company assets are bound in inventory, and the total cash ratio is lower than 0.2; which is very low. Furthermore, the company cash flow has been also negative in 2019 and 2016. The company’s lack of concern for the strength of its cash reserves is evident; however, it can work on it to make it better as investors and analysts consider it as an important financial strength indicator.
Introduction
The company Woolworths Group Limited, operates in New Zealand and Australia through its 196,000 employees and more than 3,292 stores. The main operations of the Group of Woolworths deal with retail operations. The company Group segregates its operations into Hotels, BIG W, Endeavour drinks, Australia Food, and New Zealand Foods. The Woolworths Supermarkets and Metros come under the Australian Food segment under which around 1024 markets and stores are operated. The Endeavour Drinks segment includes around 1577 stores of BWS, Dan Murphy’s, and Summer gate brands. Other than this, the online platforms of these brands are also operated by the group. The 180 Countdown stores come under the segment of the New Zealand Food. The Hotels segment incorporates the dining, the accommodations, the venue hire operations, and bars and gaming operations (Woolworths Group, 2019, p. 44). The company of Woolworths reported a shareholder return of $3.1 Billion in the year 2019. The company has changed its operational strategy in the last four years. In the last four years, the company exited the Masters and then sold the EziBuy business. Other than this, the company also sold their Petrol business for $1.7 Billion and merged with the Endeavour Group intending to separate it in 2020. The online business of the company has been developed at the same time which generated around $2.5 Billion of sales revenue in the year 2019. The company has reinvested in the business of the food retail in New Zealand and the Australian markets to make it more competitive and effective (Woolworths Group, 2019, p. 13).
Income Statement Analysis
The income statement analysis shows the details of the income statement or profit or loss statement of the company. The income statement of Woolworths shows that the revenue of the company has been generated mainly from the sale of the in-store goods, the sale of the online goods, and the hospitality and leisure reserves. In terms of the segments of the company, the company generates revenue from the five segments mentioned in the introduction section.
The bar chart above shows the segment revenue composition for the years 2015 to 2019. The data is extracted from the website of Woolworths and the annual reports published by Woolworths. The segments in the bar graph are six as the Petrol segment which was later sold is also included for showing its contribution in year 2015. The Australian Food is the main contributor to the revenue while the other four contribute as well. For looking at the other segments contributions, all other four segments, the below graph is shown.
This bar chart shows that the company generates the highest revenue from the Endeavour Drinks which was bought by the company. New Zealand Food operations are the third-highest contributor to the revenue while the Hotels are the lowest contributor to the revenue.
The composition of the sales graph shows how business is generating revenue. The Gross Profit of the company is around 27% to 29% in the five years analyzed, which shows that Woolworth’s Cost of Sales is more than 60% which is very high. Furthermore, it has further increased in the five years.
Total Profit/Loss for Last five years
The company profit as the %age of the Revenue has become better in the five years. The line chart below shows that the company profit declined in the year 2016, but then it improved in the year 2017 and then it became steady in the following years as depicted in the graph. The company profit declined in the year 2016 because of the lower sales in the Petrol segment which it later sold in 2017 (Woolworths Group, 2016, p. 9). The company later improved its sales because of the improved sales in all segments and with the gain in sales from the Petrol Business.
Horizontal Analysis
The horizontal analysis is conducted to show the growth or decline in the factors across time. Below, the line graph shows the changes in all costs and expenses. The Cost of Sales is evidently the biggest cost for the company while all other expenses fall far below. The Cost of Sales has declined in the year 2016 however it has from then increased steadily with the rise in the revenues.
The detailed analysis of all other expenses shows that the company Sales and General and Advertising expense is the largest in all other expenses. However, this declined in the year 2016 but later increased steadily with years. All other expenses have remained same over the years with only minor changes.
Statement of Financial Position Analysis
The examination of the Balance Sheet or the Financial Position Statement depicts the development in the company resources over the years and the composition of its balance sheet in terms of the assets, equities, and liabilities.
Horizontal Analysis of Assets, Liabilities, and Equities
The bar chart below shows the comparison of the company liabilities, assets, and equity. The company total assets are composed of the total liabilities and its total equity as per the balance sheet equation. The company liabilities had been always higher than its equity showing its more debt based sourcing of the resources. However, the dependency on the debt sourcing has lowered with time, and the equity portion has increased with time. The highest liabilities are reported in the year 2016.
Composition of Assets:
The assets of the company as shown in the below bar chart has declined with the passage of time. The company has reclassified its balance sheet items for Home, Timber, and Hardware within the Net Assets held for sales in the year 2016, which impacted its values and resulted in a decline in the total assets value. The company fixed assets and investment declined substantially in 2016 as well because of the impairment charges of the significant items of around $1633 million. Similarly, the impairment charges related to the intangible assets also led to a decline of $439 million. Furthermore, the decline in the equity of the company was basically because of the losses from the discontinued operations in 2016 (Woolworths Group, 2016, p. 13).
The 2019 balance Sheet Analysis in comparison shows how the value of the assets has increased steadily over time. For instance, the inventories increased by $4280 million while the fixed assets and investments increased as well by $528 million. The intangible assets also improved in 2019 together with the net debt for the company (Woolworths Group, 2019, p. 20). This is depicted in the bar chart below in which it is shown that the major portion of the company assets is the noncurrent assets. Other than that, the current assets of the company have remained somewhat steady and not big changes have occurred in this factor in the last five years.
Cash Flow Statement Analysis
The cash flow statement analysis is conducted to show how the company is generating and using its cash reserves. The company cash flow statement is sometimes a better indicator of the strength of the company as compared to the other statements. The below bar graph show; that the operating activities of the company have generated the cash while the investing and financing activities have consumed it in the last five years.
Cash Flow from operating activities:
The cash flow generated as witnessed in the other measures declined in 2016 but later improved steadily. The Annual Report shows that operations generated an improved cash flow which was basically driven from the improvement in the EBITDA. Due to the lower net debt, the company paid lower net interest which declined by $50 million in 2018. The tax payments also declined even with the higher tax expense because of the reduced income tax rate for installment. In 2019, the company higher EBITDA improved the cash flow from operations while the net interest paid also declined because of the early payment of the US Notes in the last year reducing the costs of the borrowing. The higher tax refunds caused the tax payments to be increased as compared to the last year. The sale of the Petrol business led to an increase in the Proceeds from the Sale of PPE.
Cash Flow from Investing Activities
The company proceeds from the sale of the PPE had been lower than 2017 however, the payments were consistent with the prior year. The cash used by the investing activities increased in 2018 because of the investments made in this year (Woolworths Group, 2018).
Cash Flow from Financing Activities
The net cash flow consumed on these activities of the company has increased significantly in 2019 as compared to 2018. This is because of the increment in the repayment of the borrowings and payments for the share buy-back conducted in 2019, and the higher dividend paid in 2019 (Woolworths Group, 2019, p. 78). In 2018, the company made only minimal payments of the borrowings, while the dividends paid were greater than 2017 (Woolworths Group, 2018, p. 68).
Net Change in Cash Flow
The change in the cash shows that the company has consumed more cash as compared to what it generated in 2019 and 2016. In 2018, the company generated more cash as compared to its consumption. However, this is because of the high investments and repayment of the borrowings and the payment for the buy back of the shares. Therefore, it can be said that the company should work on maintaining a steady cash reserve.
Summary of Cashflow
| Cash Flow Statement | |||||
| 2019 | 2018 | 2017 | 2016 | 2015 | |
| Net cash provided by operating activities | 2,948 | 2,994 | 3,122 | 2,358 | 3,345 |
| Net cash used in investing activities | -246 | -1,510 | -1,431 | -1,267 | -1,334 |
| Net cash used in financing activities | -2,917 | -1,124 | -1,729 | -1,475 | -1,611 |
| Net increase/(decrease) in cash and cash equivalents | -211 | 360 | -39 | -377 | 411 |
Financial Ratio Analysis:
Profitability Ratios:
The profitability ratios of a company show how the company is profitable in terms of its operations. This is depicted by computing the returns of the company.
Gross Profit Margin:
This ratio shows the margin of gross profit that the company is earning. Woolworths Group here has improved its Gross Profit margin; however, it declined in 2019. The major reason was the higher cost of sales. The company, Gross Profit margin, is higher than 40%, which is a good percentage.
ROA
The Return on Assets of the company declined in 2016 however later improved and became better in 2019. The reason for the improvement in the ROA is the better use of the Assets for the generation of the higher Net Income. The company is effectively using its assets.
ROE:
The Return on Equity of the company declined in 2016 however then improved steadily over the years. The company return remained good even with the higher equity in 2019, which is a good sign of company profitability.
Efficiency Ratios
Asset turnover:
The company Asset utilization over the years has improved with time. As shown in the line graph below, the company has effectively utilized its assets over the period.
Inventory Days:
The inventory Days shows the number of times Woolworths is converting its inventory in sales in days. The lower the number, the higher is the efficiency. The inventory days for Woolworths have declined over the years because of the improved sales.
Inventory Turnover
The inventory Turnover shows how many times the company has replaced the inventory in the period. The company turnover has become efficient with years showing its better efficiency.
Debtors Turnover
The Debtor turnover or the account receivable turnover shows the number of times the company collected its receivable from the debtors in the given period. This efficiency has improved over the years for Woolworths.
Creditors Turnover
Similarly, like Debtors Turnover, the Creditor turnover shows how many times the company has paid to its creditors. This should be lower but not so much. The company has improved this ratio as well.
Liquidity Ratios:
Current Ratio:
The current ratio shows the efficiency of company in managing its liquidity. The current ratio of the company has declined over the years. The current ratio is ideally should be above 1 to cover all the liabilities. However, the current ratio of Woolworths is lower than 1.
Quick Ratio:
The Quick Ratio here has shown that the company major current assets are bound in inventory which is not so liquid. Therefore, the company should be concerned about its liquidity.
Cash Ratio:
The cash ratio of the company is pretty low, which was also depicted in its cash flow analysis. The company should look into better managing its cash reserves and improving it over time
Capital Structure Ratios:
The solvency or capital structure shows the company solvency and sourcing strength.
Debt to Equity Ratio:
The Debt-to-Equity Ratio of the company has declined over the years because of the lowered debt source of the company. However, the company improved this ratio in 2019 because of the new debt sourcing.
Debt Ratio
As shown above, the company debt has lowered over the years, which were then improved in 2019.
Equity Ratio:
The equity of the company makes up around less than 50% of the company funding. However, the company has increased its dependency on equity sources steadily over the years.
Conclusion
The analysis of the company shows that the company financials are strong enough to improve further in the future years. However, the company liquidity and cash flow statement analysis showed some concerning features as well. The company current, quick, and cash ratio are very low. Furthermore, the company cash reserve or net cash flow has been quite low and unsteady over the years. Other than that, it has a steady solvency basis and the company profitability, and efficiency in utilization of its resources are also good enough. The income statement and balance sheet analysis showed how the company financials are strong enough to cover its weakness in the liquidity of its current assets. However, it can improve it in future to get rid of this weakness as well.
References:
Woolworths Group. (2016). Annual Report 2016. Retrieved September 5, 2019, from Woolworths Group: https://www.woolworthsgroup.com.au/icms_docs/185865_annual-report-2016.pdf
Woolworths Group. (2018). Annual Report 2018. Retrieved September 5, 2018, from Woolworths: https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf
Woolworths Group. (2019). Annual Report 2019. Retrieved September 5, 2019, from Woolworths: https://www.woolworthsgroup.com.au/icms_docs/195582_annual-report-2019.pdf
Appendix
Statements:
Income Statement:
| PROFIT OR LOSS DETAIL | ||||||
| 2019 | 2018 | 2017 | 2016 | 2015 | ||
| Continuing operations before significant items | ||||||
| Sales | $m | 59,984 | 56,944 | 55,015 | 53,072 | 58,419 |
| Cost of sales | $m | 42,526 | 40,235 | 39,086 | 37,907 | 42,205 |
| Gross profit | $m | 17,458 | 16,709 | 15,929 | 15,165 | 16,215 |
| Gross profit margin | % | 29.1 | 29.3 | 29 | 28.6 | 27.8 |
| Cost of doing business (CODB) | $m | 14,734 | 14,161 | 13,603 | 12,719 | 12,242 |
| CODB margin | % | 24.6 | 24.9 | 24.7 | 24 | 21 |
| S,G & A Expense | $m | 11,395 | 10,997 | 10,531 | 9,770 | 9,316 |
| Earnings before interest, tax, depreciation, amortization and rent (EBITDAR) | $m | 6,063 | 5,712 | 5,398 | 5,395 | 6,899 |
| EBITDAR margin | % | 10.1 | 10 | 9.8 | 10.2 | 11.8 |
| Rent expense (including fit out rent) | $m | 2,117 | 2,061 | 2,034 | 1,964 | 1,951 |
| Earnings before interest, tax, depreciation and amortization (EBITDA) | $m | 3,946 | 3,651 | 3,364 | 3,431 | 4,948 |
| EBITDA margin | % | 6.6 | 6.4 | 6.1 | 6.5 | 8.5 |
| Depreciation and amortization expense | $m | 1,222 | 1,103 | 1,038 | 985 | 975 |
| EBIT | $m | 2,724 | 2,548 | 2,326 | 2,446 | 3,973 |
| EBIT margin | % | 4.5 | 4.5 | 4.2 | 4.6 | 6.8 |
| Finance costs | $m | 126 | 154 | 179 | 208 | 213 |
| Woolworths Notes interest | $m | – | – | 15 | 38 | 40 |
| Profit before tax and significant items | $m | 2,598 | 2,394 | 2,132 | 2,200 | 3,720 |
| Income tax expense | $m | 780 | 718 | 651 | 677 | 1,113 |
| Profit after tax before significant items | $m | 1,818 | 1,676 | 1,481 | 1,523 | 2,607 |
| Discontinued operations before significant items | ||||||
| Profit/(loss) after tax before significant items | $m | 112 | 119 | 112 | -117 | -162 |
| Group net profit after tax before significant items | $m | 1,930 | 1,795 | 1,593 | 1,406 | 2,445 |
| Significant items after tax | $m | 829 | – | – | -3,754 | -308 |
| Group net profit/(loss) after tax | $m | 2,759 | 1,795 | 1,593 | -2,348 | 2,137 |
| Non-controlling interests | $m | -66 | -71 | -59 | 1,113 | 9 |
| Profit/(loss) | $m | 2,693 | 1,724 | 1,534 | -1,235 | 2,146 |
Balance Sheet:
| BALANCE SHEET | |||||
| 2019 | 2018 | ||||
