What is new with these Dividend Paying Supermarket Giants?

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Australian Economy, Macro Economics

Both Wesfarmers Ltd and Woolworths Group Limited, are on a journey to a purposeful business in order to develop a better picture of Australia and this cant be done unless they create a better environment. In an attempt to cater to the environment, both the groups are working on their energy use strategies and reduction in carbon footprint. For instance, Wesfarmers’ Coles is trying to divert its 90% of supermarket waste from Landfill and donate meals to people in need. Similarly, supermarket giant Woolworths is setting to phase out its plastic straws along with reductions in plastic packaging of fruits and vegetables. Not just this, the group aims to launch a new reusable shopping bag with regards to sustainability initiatives in Australia. Clubbed with some perks like lifetime replacement offer for the bag, the group is expecting to attract more customers. Coles on the other hand, is investing to contain the impact of its assets and operations on the environment. This has been slated to be done through initiatives directed to greenhouse gas emission reduction, bringing more proficiencies in supply chain, and recycling waste. Last year, Coles announced it would phase-out its single use plastic bags from all stores.

While this new dimension will also set a platform on which the two rivals will be evaluated. However, looking at the performance so far, WOW has been able to gain more market share in the recent times. The giant in the consumer staple sector, currently trades at a market price of $28.72 at a market capitalization of $37.4 billion (as at June 06, 2018). The annual dividend yield for the stock is 3.27% and the company has been trying to capture a better market share with each passing month. The Group EBIT from continuing operations has been up 9.9% with Australian food EBIT up 11.1% despite continued investment during the first half of 2018. The group reported to have over 1000 supermarkets and Metro Stores as at third quarter through to 13 weeks- period to April 2018. The group upgraded 20 stores, opened one Metro store and closed two supermarkets during the quarter. There was a significant improvement in Australian Food’s voice of customer (VOC) scores with overall customer satisfaction of 81%. WOW now aims to focus on improving shopping experiences across all stores with strategic initiatives put in place and this has digital experience as a key aspect.

In comparison, Wesfarmers trades at quite a high level at a price of $ 45.670 with an annual yield of 4.93%. The stock trades at a higher P/E in comparison to WOW. Wesfarmers has announced its retail sales results for the third quarter of the 2018 financial year with Bunnings Australia and New Zealand (BANZ) delivering a strong quarter, with total sales growth of 8.9 percent, through continued focus on delivering increased value and better experience to customers. However, adverse weather in March 2018, resulted in a decline in total sales of 6.5 percent (13.5 percent in local currency terms) for the quarter. Sales momentum in Coles continued to improve during the quarter, with headline food and liquor sales growing by 1.9 percent. Coles continues to increase and optimize its store network, opening four supermarkets and closing three during the quarter which resulted into a total of 807 supermarkets at the end of the quarter. Adjusting for the earlier timing of the Easter in the 2018 financial year, comparable store sales decreased by 3.2 percent for the quarter.

While plastic bag ban was not enough for the duo, another zone that is gearing up is the digital domain in terms of popularity among the players. We know by now that Woolworths ventured into digital domain and prioritised online platform under its long-term growth strategy, Wesfarmers has also taken up a stake in e-retailer ONTHEGO (OTG), for coming up with digital offerings. The latter is expected to help Wesfarmers’ Workwear Group to expand on online capabilities and outspread its product categories.

This comes at a time when the market sees Wesfarmers’ recent move of divesting its Bunnings UK and Ireland (BUKI) business, which was never settled in terms of overly optimistic growth outlook and capital investment. Wesfarmers is expecting a loss of about $350 million to $406 million from the divestment, and this has become a point of concern among investors.

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Earnings per Share (Source: Thomson Reuters)

While the battle seems to be a never-ending one with fierce competition stemming from different directions, the player who can manage costs with growth in fundamental performance would always be the choice for investors.


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