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ACCT1501 Case Study

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by

Kylie Chan

on 7 January 2014

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Transcript of ACCT1501 Case Study

Moreeeeeeee Weaknesses
ki's notes
woolies' performance
net profit for this year expected to grow 2-6%, (less than the 10yr growth rate previously)
ROE expected to fall from 28% (2010-11) to 26.1% by 2013-14
heavy capital investment in property development and new stores accumulated during GFC
can boost returns quickly by offloading some property assets (STRENGTH)
shares cheaper than coles'

wesfarmers (coles) performance
returns on equity fallen from 25% (2006-07) to 8% after acquiring coles
1/3 of woolies ROE (return on equity)
citigroup expects ROE to rise from 8% (2010-11) to 10.1% this yera, and reach 11.4% in 2013-14
improved returns in Coles and coal
woolies vs wesfarmers (coles)
DANIEL'S SLIDE
Joyce's notes
Woolworths:
Strength
1 Woolworths is well positioned to benefit from a rebound in consumer spending if it occurs-Woolworths generates 97% of its earnings from retailing

W
e
akness
1
Woolworths will be more exposed than westfarmers if consumer sentiment remains subdued.
Strength:
1 Positive prospect
- Analysts and fund managers expect Wesfarmers (coles) to outperform Woolworths on almost every measure over the next 3 years
-Earnings from coal are expected to double and earnings from insurance will rebound
-Plenty of scope to boost margins which are about 4.2% and are expected to reach 5.4% in 2 years time

2 Diversified earnings from different areas
-75% from retail / 25% from coal

3 Good portfolio assets
-23% increase in profits in August
-124% increase in coal earnings
-21% profit improvement (offset weak results from insurance and Target)
Woolworths
-ShAREHOLDER RETURNS 383%
-18% compound anual growth in earnings
within 10 years

Weaknesses- plans to open 39 new stores could harm other existing stores - Guadganuolo (aviva investors)

Concern over woolworths 7.4% grocery margins will come under pressure from new businesses, coles, aldi constco etc
Coles
Strength:
1 Positive prospect
- Analysts and fund managers expect Westfarmers (coles) to outperform Woolworths on almost everymeasure over the next 3 years
-Earnings from coal are expected to double and earnings from insurance will rebound

2 Diversified earnings from different areas
-75% from retail / 25% from coal

3 Good portfolio assets
-23% increase in profits in August
-124% increase in coal earnings
-21% profit improvement (offset weak results from insurance and Target)

Weakness:
1 Low profit of Target
Performance of Woolies 10 years - November 2010:
- delivered total shareholder returns of 383% due to 18% compound annual growth in earnings and dividends per share
- years
How Woolies aims to restore growth:
- Woolworths' actions have had detrimental effects on its performance.
- Its eagerness to dominate the market is shown through the opening of
39 new supermarkets
-

sales has increased by 4.8%
- Woolworths food and liquor division reported revenue of $10.35 b and $13.2b across the entire supermarket division in Australia and New Zealand

This will :
- delay required breakeven time
- Affect the profits of existing stores
- Due to this, the
rate of return
is expected to fall from
28% (2010-11) to 26.1% (2013-14)
Woolworths
Performance of Woolies 10 years - November 2010:
Delivered total
shareholder returns
of 383% due to 18% compound annual growth in earnings and dividends per share
- Growth slowed due to Coles
- Coles outperformed woolies by 20% over 2 years
- 3.8% growth in 2012
Performance of Woolies over recent 2 years :
- Net profit

for this year expected to grow 2-6%, (less than the 10yr growth rate previously)

-
Restore earnings
per share growth to 10%
- look for
partnerships overseas
- increase
home improvement market
by $40 million
- Open 100-150
big box masters stores
over next few years.
Woolworth Current Performance
Predicted perfromance for this year
Weakness:
1 Low profit of Target and weak result from insurance
2 Woolworths still outperforms coles
3 Increased water consumption
Presentation by:
Wing Ki Kylie Chan
Alicia Nguy
Joyce Lim
Daniel Chen
The strengths and weakness of Wesfarmers (Coles)
Strengths
and
Weaknesses
of
Woolworths


Recent Performance
23% increase in profits (Aug 2013)
rate on equity fallen from 25% (2006-07) to 8% after acquiring coles
1/3 of woolies ROE (return on equity)
75% earnings from retail, 25% from other division
Predicted Performance
citigroup expects ROE to rise due to improved returns in Coles and coal
8% (2010-11) to 10.1% this year, and reach 11.4% in 2013-14
Margins expected to reach 5.4% in 2 years time
Earnings would be $800 million (70%) higher than they are now if the had margins like woolworths.
coal and insurance earnings expected to lift net profit by 31%
Wesfarmer's (coles) Performance
Past Performance
past 2 years
outperformed woolies in terms of TSR by 20%

2011 results
124% increase in coal earnings
21% profit improvement at coles
Strengths
Sheer
number of stores
and branches - Woolworths supermarket, Dan Murphys and Woolworths liquor allow woolworths to
avoid minor threats
and grab
opportunities
.
Weaknesses
Excessive stores redistributes profit from nearby branches resulting in decreased average profit.
Woolworths expansion into the "hardware" sector will incur heavy losses due to competition. eg. Bunnings
Woolworths shares are already slightly cheaper than wesfarmers with a market value of $34.43 per share as opposed to $43.00 for wesfarmers. It is predicted that this price gap would further increase by the end of 2013.
THE END
To further boost margins
need to reduce costs of doing business
needs to improve supply chain efficiency
Woolworths faces increasing overhead expenses with rising grocery prices.

Company cannot compete with reduction in petrol profit margins
Woolworths stores are concentrated within New Zealand and Australia and derives 91.9% of its revenue from its Australian branches
in general,
expected that Wesfarmers would continue to outperform woolies for the next three years
Due to having
97%
of its earnings from retailing: ie food and liquor and general merchandise, it is well positioned to benefit from an increase in consumer spending
5 Year Share Prices
Coles
Woolworths
Within the past 5 years Woolworths has only had a small gain as opposed to Wesfarmers $30 increase
Full transcript