WOW Up, But Slowing, FLT Up, But Slowing

Sydney, Aug 27, 2008 (ABN Newswire) - It was to be expected that leading retailer, Woolworths would see slowing growth in 2009 after the breakneck rise in sales and earnings from 2006 and 2007 and that's that the company forecast yesterday in its latest profit statement.

This slowing growth also explains why it was pushing so hard to takeover JB Hi-Fi, a deal which fell over at the last minute earlier this month, and why its trailing hints about an overseas corporate play (Not in new Zealand).

And the volatile market conditions and the reluctance of the credit crunch to go away have seen the company reverse a previous commitment to some sort of capital management this year, if an acquisition didn't happen.

But it would seem that the company might be preparing to embark on another international deal as it made mention of its overseas interest.

There have been rumours that the company might be looking in the US.

The JB Hi-Fi deal didn't happen and it looks like the attempt to buy The Warehouse in New Zealand is struggling. But while the company says it will monitor the situation, the mooted buyback looks like it won't happen for while.

The retailer certainly has the firepower, although buying anything now as an economic slump deepens in some key markets, is fraught with danger.

Another solid year in 2008-09 will drive earnings and cash flow to the point where the market starts urging either a big deal, or capital management.

Although the retailer is expecting earnings and sales growth to slow, it still expects to see profits grow by more than 10% for the 10th year in a row, and expects earnings to once again outpace sales growth.

Woolies said yesterday it was expecting net earnings to rise by between 9% and 12% in the present year, less than half the 25.7% jump in 2008.

Sales growth would be in the "upper single digits,'' the company forecast, compared to the 10.7% rise in top line sales (4.9% comparable store growth) to $47.29 billion for 2008.

A 10% rise in earnings would see them come in around $1.822 billion, compared with the $1.627 billion earned in the 53 weeks to June 29.

Chief Executive Officer Michael Luscombe told the market in a statement that "We have continued to refine our brand proposition with significant investment in price, merchandise range and quality during the year,'' Luscombe said in the earnings statement. ``This investment continues to deliver gains in market share.''

The 2009 forecast is based on a 52-week trading period after 53 weeks in the past fiscal year. Adjusted for a 52-week period in 2008, profit is expected to expand by between 11% and 14%.

Woolies' shares eased 16 cents to $26.70 at the close yesterday after hitting a day's low of $25.84.

The company will pay a total dividend for the year of 92 cents, up from 74 cents in 2007 with a final of 48 cents a share.

The group posted a 19.8% increase in EBIT to $2.5288 billion.

The Australian supermarket division grew EBIT by 18.8% and the New Zealand Supermarkets increased EBIT by 9.1%.

Food and liquor grew EBIT by 19.8% overall, but the petrol EBIT dropped by 1.2% as the company absorbed some of the sharp price rises in may-June.

The group's general merchandise division, which includes Big W and consumer electronics in Australia, NZ and India, increased EBIT by 9.2%, while Hotels posted a 17.1% lift in EBIT, despite weaker sales caused by smoking bans and other restrictions.

"Australian food and liquor continues to perform well and BIG W, petrol and consumer electronics have had a good start to the new financial year.

"Hotels have experienced a pleasing improvement in gaming sales.

"New Zealand Supermarkets has experienced tight trading conditions as in the fourth quarter," it said.

The company said that given the current uncertainty in the debt and equity markets, it would defer any capital management activity at this time.

It said a share buyback would be assessed continually in the context of other initiatives and the capital market environment.

"Our current focus is to maintain a capital structure that will preserve our capital strength and give us the flexibility to pursue further growth opportunities.

"Our balance sheet, debt profile and strength of our credit ratings ensure we are very well placed for future growth both organically and through acquisition."

It said it was in the early stages of evaluating opportunities internationally.

"Any international expansion would have full oversight from the board, be undertaken in a prudent and disciplined fashion and meet the hurdles required for all our capital investment decisions," it said.

Besides NZ, the company has a small but growing operation in India.

"Our business venture with TATA is still in its infancy with 22 retail stores operating under the "Croma" brand. As part of this venture Woolworths Limited provides buying, wholesale, supply chain and general consulting services to TATA.

"The wholesale operations are meeting our expectations and recorded sales of $104 million (2007: $25 million) during the year and made an operating loss of $5.0 million (2007: $4.3 million)."

But that's clearly too small for the sort of deals the company is supposedly eyeing.

Woolworths said its cost of doing business declined by 43 basis points (0.43%), and 38 basis points excluding one-off items.

And that saw its most important ratio, the so-called EBIT to Sales margin in its Australian supermarkets again rise to 5.52 cents in the dollar from the then impressive 5.16 cents in the dollar margin in 2007.

The Australian supermarkets food and liquor businesses are the financial powerhouse for the company and the key to it maintaining strong earnings growth.

The company earned a gross margin (excluding hotels) of 23.92 cents in the dollar across the entire business, just up from the 23.89 cents in the dollar last year. Including hotels the gross margin eased slightly to 25.30 cents from 25.32 cents.

Like Woolworths, travel agent and operator, Flight Centre is looking for a slower and lower 2009 after a hectic 2008.

And like Woolies, the market didn't take kindly to the news and sold off the shares, which ended down 49 cents at $18.40 after trading through a big spread from $18.43 to $17.80.

Pre-tax profit grew 40.4% to $212.9 million in the June 30 year, - after excluding a one-off $22.4 million gain in 2006/07 - and was in line with its guidance for a result around $212 million. (The company had seven or eight upgrades during the year).

The main driver for the company was the 7%-8% surge in the number of Australians who travelled offshore in the year as they took advantage of a rising Aussie dollar, which cut the costs of travel, especially against the US.

"Flight Centre starts the new financial year with significant momentum from 2007-08, a strong balance sheet and with foundations in place for further growth," acting chief executive Shannon O'Brien said in a statement to the ASX.

"While we do not expect to replicate the 30 per cent to 40 per cent increases we have achieved in each of the past two years, we will be disappointed if we do not increase pre-tax profit by 10 to 15 per cent," he said.

"Shop and business growth during 2008/09 will predominantly come from organic expansion of FLT's existing travel brands.

"The company will continue to pursue strategic acquisitions and joint ventures if opportunities arise. FLT currently holds 50% interests in two joint ventures, a recruitment venture with Employment Office Australia and an adventure travel operation with wholesale specialist Intrepid.

"In May 2008, the company also announced preliminary plans to form a joint venture with bicycle retailer 99 Bikes, which is partly owned by Graham Turner's family company.

"FLT is on track to implement a new corporate structure during the first half of 2008/09.

"As disclosed previously, the new structure will provide the company with the flexibility to introduce a moderate level of debt into its business if it chooses to do so at an opportune time in the future, while continuing to comply with complex regulatory requirements relating to travel agencies in Australia and other jurisdictions."

Net profit rose 18% to $143.15 million, up from $120.82 million in the 2007 year when the company's shareholders and or directors said 'no' to two private equity buyout proposals.

Mr O'Brien said the company's established markets in the UK, South Africa, Canada and Australia continued to perform well and were expected to drive profit growth.

He said the company had also identified further growth opportunities within wholesale and corporate travel globally.

Flight Centre said total transaction value (TTV) rose 13.2 per cent to $10 billion in 2007/08, while revenue grew 18.4% to $1.4 billion.

Its income margin, expressed as revenue as a percentage of TTV, increased to 13.36% at the end of the year, from 12.98% the end of 2006/07.

"Flight Centre continues to increase its scale in all countries, while also developing a broader foundation," Mr O'Brien said.

"In addition to being one of the world's leading leisure travel providers, the company is now a significant and emerging presence in global corporate and wholesale travel.

"We see our diversity - of both brands and geography - as a platform for the future and a real strength."



Flight Centre declared a final dividend of 48.5 cents per share, up from 46 cents in the previous corresponding period. That took the total for the year to 86 cents a share from 66 cents. The interim was boosted to 37.5 cents from 20 cents in 2007.


 

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