WOW 0.48% $33.17 woolworths group limited

Take over possibly read last paragraph. The pace of the hardware...

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    Take over possibly read last paragraph.

    The pace of the hardware rollout is slowing as Woolies redirects spending to lower prices and better service in its supermarkets, however, and Merrill Lynch analyst David Errington told O'Brien and Waters on Friday that the Masters actually needs to double sales just to break even.
    As for what might be an acceptable return on funds invested, the bar is set high. Wesfarmers' Bunnings group is the dominant hardware retailer, and it lifted its earnings before interest and tax by 11 per cent in the June year, earning 11.4¢ a dollar of sales.
    Waters observed on Friday that the share market is notoriously impatient for success, but Errington isn't the only one who thinks that Woolies should call off its hardware invasion, and stop destroying value.
    The investment question is whether Woolies will get better from here.
    Its shares are down 10.5 per cent this year, and 29 per cent below their high in April last year. They are valued at about 14 times the latest profit. That credits Woolies with no recovery upside, at a time when change is coming.
    The punt for those buying of course is that it will be change for better – but in some ways Woolies is where Wesfarmers was at after it took over the Coles group in 2007.
    Woolies was totally dominant at that time, not just in Supermarkets but in general merchandising, where Big W was showing Coles' discount chain, Kmart, a clean pair of heels.
    The underperformance of the retail chains that Wesfarmers acquired was latent retail market AND sharemarket outperformance however, and Wesfarmers extracted it.
    Coles refreshed its offer, launched its "down down" supermarket pricing campaign, and began to get both revenue and profit margin expansion. The Kmart chain also switched to an every-day low price strategy, and its earnings rebounded.
    Woolies lost momentum as it defended profit margin at the expense of market share, and continued to sink money into the hardware strategy. Its shares are down 4.65 per cent over three years. Wesfarmers shares are up more than 18 per cent.
    The reverse outcome is not guaranteed now that it is Woolies that is off the pace.
    It is however the nature of the corporate world that successful strategies create an advantage that is competed away over time as unsuccessful companies reinvent themselves.
    Smaller, vulnerable companies can be wiped out by this bellows effect. Woolies is not small however. Its supermarket market share is about 42 per cent, compared with 32 per cent for Coles and 8 per cent for Aldi. Even with its share price down at levels last seen 2012 it is valued at almost $35 billion.
    That means it is most likely to restore its fortunes, or be taken over at a healthy premium.

    The success or failure of a strategic reset will take time to determine, but Friday's profit result opens the takeover window. Private equity consortiums, Wal Mart or anyone else thinking about a bid has fresh numbers for a valuation.


    My 2 bobs worth
 
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