FINANCIAL ANALYSIS

WOOLWORTHS LIMITED V/S WESFARMERS LIMITED

Presented to: Dr. Jeffrey Wong

Group Members:

Name Student ID
Mr Avinash Radhakrishnan 43939589
Mr Ravi Nikhil Sulekere 43971326
Mr Nitin Ahuja 43967159
Ms Poonam Chowdhury 43983707

EXECUTIVE SUMMARY

 INDUSTRY OVERVIEW
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 KEY DRIVERS AFFECTING THE INDUSTRY

 COMPANY BACKGROUND
 Woolsworth overview
 2014 trends
 Swot analysis – woolsworth
 Wesfarmers overview
 2014 trends
 Swot analysis – wesfarmers
 STOCK PERFORMANCE
 QUANTITATIVE ANALYSIS
 Profitability ratios
Return on assets
Return on equity
Profit margin after tax
 DuPont analysis
 Liquidity ratios
Current ratio
Quick ratio
Account receivable to working capital
Inventory to working capital
Sale to working capital
 Operating ratios
Days in inventory
Days in receivables
Days in payables
Cash conversion cycle
 Capital structure ratios
Debt to asset
Debt to equity
 Investment valuation ratios
 SGR
 CONCLUSIONS
 REFERENCES & BIBLIOGRAPHY
 APPENDIX

Executive Summary

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This Financial Analysis Report is prepared by MGSM Students as a part of MGSM840

Accounting for Management. This report provides insights into the supermarket industry in
Australia.

A thorough analysis has been conducted considering an in depth understanding of the global
economic environment, industry trends, qualitative and quantitative analysis of both Woolworths
and Wesfarmers which are the two largest super market chains in Australia with a Global
ranking.

The key objective of this report is to analyze and recommend investment opportunities in either
of the two companies or none.

Our main focus of analysis is Woolworths. Looking at the last five years, we have chosen
Wesfarmers as the comparable competitor because it has gained significant ground on
Woolworths to entrench itself as the second-largest player in the industry.

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Industry Overview

The Supermarket and Grocery Stores industry is one of the most fiercely competitive in
Australia. They have an increasing role in the development of the Australian agricultural sector.
The industry landscape has changed immensely over the past five years due to the increasing
popularity of private-label products. Industry’s revenue has remained strong, and is projected to
post annualized growth of 3.8% over the five years through 2015-16. This includes forecast
growth of 2.5% to $93.3 billion in 2015-16.The industry’s two largest companies, Woolworth and
Wesfarmers control close to 80% of the grocery market and large chunks of liquor and fuel
sectors too. They have chased market share by slashing the prices of goods. Given the mature
nature of the industry, players will need to fight even harder for market share over the next five
years.

Industry revenue is forecast to grow at an annualized 2.2% over the five years through 2020-21,
to reach $103.9 billion. Fierce competition, subdued consumer sentiment and the continued
expansion of private-label products are all expected to contribute to price deflation, constraining
industry revenue growth.

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OTHER PLAYERS:-
ALDI:-

Established in Germany in 1948, ALDI operates discount self-service stores with a network
spread across the world. ALDI was initially a dry-goods retailer, with fresh produce introduced in
the 1980sl. The Australian entity, ALDI Stores Supermarkets Pty Ltd, supplies largely exclusive

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product lines owned by the business across three main ranges: grocery lines, fresh produce and
special buys. However, ALDI has begun stocking a larger number of branded products. ALDI
entered the Australian market as a private company in January 2001, opening two stores in New
South Wales. A typical ALDI store stocks about 1,000 products, compared with about 30,000 in
an average Coles or Woolworths store. ALDI currently operates approximately 350 stores.
Parent company ALDI South has invested $700 million to extend ALDI's network into Western
Australia and South Australia.

The company has had a significant effect on the Supermarkets and Grocery Stores industry in
Australia. Since commencing operations in Australia, ALDI has pushed the major supermarkets
to reduce prices by offering a national price, ensuring continuity in prices nationwide.
Consumers have responded to these low prices, contributing to rapid revenue increases and
dramatic expansion of the store network. ALDI is estimated to hold 8.2% market share in 2015-
16, an incredible accomplishment for a chain that launched in 2001.

ALDI's industry-related revenue is anticipated to grow at an annualized rate of 11.5% over the
five years through December 2015.

METCASH:-

Metcash Limited is a publicly owned Australian company that is based in Macquarie Park, NSW.
The company was originally established as a local grocery store called Davids in 1928. Metcash
earns over 90.0% of its income through wholesaling. It manages a portfolio of brands that
independently owned stores pay a fee to operate under. Metcash is responsible for the
purchasing, merchandising, warehousing, marketing and distribution of products to stores. The
company earns a negligible portion of its revenue through franchise fees, instead generating
revenue through exclusive wholesaling agreements with the stores operating under its brand
names. Metcash has lost market share over the past five years, due to intense competition and
lower store numbers than the other big players. Earnings from its stores are forecast to remain
stagnate over the five years through 2015-16.

KEYS DRIVERS AFFECTING THE INDUSTRY

Disposable Income:
The level of household disposable income affects the industry. Consumers are more likely to
focus on their household basic necessities rather than going for luxury products during periods

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of low disposable income. Disposable income is forecast to rise in 2015-2016, which will help in
boosting industry revenue.

Social Values:
Changing societal values alter purchasing behavior of consumers. This has a significant effect
on the consumer spending levels at supermarkets. For instance consumers these days are more
inclined towards purchasing organic produce.

Population:
Population of an area along with the age distribution will have an impact on the revenue of the
industry. The location and number of the stores will be decided based on the population density
of the area and the age distribution will contribute towards the type of products that need to be
stocked. New residential developments will increase the amount of consumer traffic at the
existing supermarket locations which could also raise demands for new stores.

COMPANY BACKGROUND

WOOLSWORTH OVERVIEW

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Woolworths Ltd is one of the largest companies in Australia, as measured by annual revenue.
The company's headquarters are in Bella Vista, NSW. Established in 1924 and listed on the
ASX in 1993, Woolworths is one of the fastest growing and most innovative companies in the
industry. The company operates in Australia and New Zealand across several segments
including food and liquor retailing, general merchandising (Big W), home improvement retailing
(Masters Home Improvement) and hospitality (through over 300 hotels). Woolworths' most
lucrative operating segment is food and liquor retailing. The company operates in the industry
through its everyday supermarkets, Woolworths and Safeway, and its Thomas Dux premium
supermarkets.

Woolworths aims to open between 15 and 25 stores per year and enjoys the highest profit
margins in the industry. The company has also shifted focus towards online sales. In August
2014, Woolworths opened its first dark store (i.e. with no customers), dedicated to online
shopping purchases. The store was opened in Mascot, NSW, as a trial to determine if dedicated
warehouses were more efficient for online shopping than the current personal shopper in a local
supermarket set-up. The company is reportedly considering opening dark stores in Melbourne
and Brisbane.

2014 COMPANY TREND

 Emerged as Australasia’s largest domestic retailer with online sales over $1.2 billion for
FY14, increasing by 50% on previous year.
 Continued to lead on innovation with Australia’s first full range dedicated online fulfilment
grocery store.
 Acquired EziBuy with the integration progressing well to drive online growth in general
merchandise.
 Australia fastest growing home improvement offer.

SWOT ANALYSIS - WOOLSWORTH LTD

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WESFARMERS OVERVIEW

Wesfarmers Limited, one of Australia's largest diversified companies, is headquartered in Perth

and has traditionally operated in retail trade through its Bunnings hardware business. However,
Wesfarmers became a pivotal player in the Supermarkets and Grocery Stores industry in late
2007, with its acquisition of Coles Group for $22.1 billion. Wesfarmers operates in the industry

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under the Coles and Bi-Lo businesses, which it acquired as part of the 2007 deal. The majority
of Wesfarmers supermarkets operate under the Coles brand. While some supermarkets
continue to operate under the Bi-Lo brand, they fall under the new Coles division of Wesfarmers.

Coles (formerly Coles Myer) was created in 1985 with the merger of GJ Coles and Coy Limited
and the Myer Emporium Limited. After the merger, Coles expanded rapidly for two decades,
opening new stores and acquiring existing independent supermarkets and chains. Coles has
gradually increased its store numbers over the past five years, as it has fine-tuned its operation
and development of its supermarket chain. This has allowed the company to open more stores
with a developed, successful formula, helping it to compete with the largest player and its main
competitor, Woolworths.

Over the past five years, the Coles division has gained significant ground on Woolworths to
entrench itself as the second-largest player in the industry. Under the ownership of Wesfarmers,
the Coles brand has been rejuvenated and revenue has soared, making it one of the most
successful turnaround stories in Australian retail history. Revenue growth has allowed Coles to
become the 18th-largest global retailer.

2014 COMPANY TREND

 Coles has announced plans to open an additional 70 stores nationally over the next three
years, as it continues to challenge Woolworths for the place of largest player in the
industry.
 Introduced a new health star labeling system which makes it easy to find the nutritional content of
a product and compare products
 Launched a Healthy Choice Aisle for Coles online customers in partnership with George Institute
for Global Health
 Increased profits in Food and Liquor by 12.3% and Sales by 4.7%
 Coles mobile Wallet application has won outstanding value award for 2014

SWOT ANALYSIS – WESFARMERS LTD

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STOCK PERFORMANCE:-

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QUANTITATIVE ANALYSIS:
PROFITABILITY RATIOS

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Return on Assets (ROA):

The way a company manages its assets is one of the fundamental indicators of the company’s
financial performance and profitability. ROA gives a clear picture of how efficiently the
management is utilizing the assets available at its disposal, to produce profits during a period. It
measures net income produced by total assets during a period by comparing net income to
average total assets.

ROA is seen to be higher in Woolworths than Wesfarmers thus implying that the company is in
better utilization of its assets

Return on Equity (ROE):

This ratio is one of the most important from the owner’s or shareholder’s point of view. ROE
measures a corporation’s profitability by revealing how much profit it generates with the money
shareholders have invested. The management’s ability to realize return for the owners on the
capital invested by them is measured with this ratio. A higher ROE is definitely what the owners
are looking for.

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In this case Woolworths is seen to have a higher ROE over the 5 years as compared to
Wesfarmers, hence stating that the company is in better utilization of its funds invested by
Shareholders/owners.

Profit Margin:
A financial performance ratio, calculated by dividing net income after taxes (NPAT) by net sales.
A company's after-tax profit margin is important because it tells investors the percentage of
money a company actually earns per dollar of sales. This ratio is interpreted in the same way as
profit margin - the after-tax profit margin is simply more stringent because it takes taxes into
account.

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The investors seem to be getting almost the same returns in both companies however
Woolworth’s earnings and returns are slightly greater than Wesfarmers.

DUPONT ANALYSIS:-
Return on Equity (ROE) is a strong measure of how the company’s management creates value
for its shareholders. This number can be misleading unless we breakdown the ROE
components. Generally if the ROE goes up it is a great sign for the company as it is showing the
rate of return on shareholders’ equity is rising. The problem is the increase in ROE can be due
to the company taking in more debts, thereby increasing the equity which can be good thing.

The DuPont analysis is broken down into 3 step equations:

ROE = (Profit margin)*(Asset turnover)*(Leverage)

 Profit Margin is how much profit the company gets out of the revenue.
 Asset turnover is how effectively the company makes use of its assets.
 Leverage is the use of financial instruments or borrowed capital to increase return on
investments

If the ROE goes up due to an increase in the profit margin or asset turnover, it is a positive sign
for the company. However, if the leverage is the source of the rise, and the company is already
appropriately leveraged, it can make things bit more risky.
Even if the company’s ROE has remained unchanged, the DuPont examination can be helpful.
Suppose a company’s ROE has not changed but DuPont examination reveals that both Profit
Margin and asset turnover decreased the only reason ROE remained unchanged was due to
increase in leverage. No matter what the initial situation of the company, this would be a bad
sign.
Individual assessment of the various components is shown separately.

When we examine Woolworths and Wesfarmers using DuPont we can see that Woolworths has
a slightly better profit margin and are making better use of the company assets. Though both the
companies seem to be appropriately leveraged Woolworths is a bit better leveraged than
Wesfarmers.

Leverage:
Generally, companies have two options when they wish to raise money. They can issue shares
of stock, which are also known as equities. Alternatively, they can issue bonds, which are also
known as debt instruments. Leverage ratios tell investors how much debt a company has
outstanding relative to the equity in their capital structure. Any leverage less than 3 is seen to be
satisfactory.
In both the companies the leverage ratio is less than 3 however in the above case the
Woolworths has better leverage than Wesfarmers and the equity that is invested more in
Woolworths in comparison to Woolworth

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DUPONT ANALYSIS
WOOLSWORTH
2010 2011 2012 2013 2014
ROA% 10.87 10.10 10.10 10.09 10.10
ROE% 25.83 26.88 25.80 24.19 23.27
Profit Margin 0.04 0.04 0.04 0.04 0.04
Leverage 2.38 2.66 2.55 2.40 2.30
Asset Turnover 2.75 2.52 2.54 2.63 2.51
WESFARMER
2010 2011 2012 2013 2014
ROA% 3.95 4.64 4.97 4.86 3.99
ROE% 6.36 7.58 8.31 8.19 6.19
Profit Margin 0.03 0.04 0.04 0.04 0.03
Leverage 1.61 1.63 1.67 1.68 1.55
Asset Turnover 1.30 1.32 1.35 1.31 1.48
LIQUIDITY RATIOS:

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Current Ratio:
This ratio gives a clear picture of the company’s ability to service its current obligations with the
help of current assets. It is an indication of the firm’s market liquidity and ability to meet creditor’s
demands. A 2:1 ratio is considered an acceptable range for this ratio. Though it varies from
industry to industry and is generally between 1.5 and 3 for healthy businesses. If a company's
current ratio is in this range, then it generally indicates good short-term financial strength. If
current liabilities exceed current assets (the current ratio is below 1), then the company may
have problems meeting its short-term obligations. If the current ratio is too high, then the
company may not be efficiently using its current assets or its short-term financing facilities. This
may also indicate problems in working capital management.

In the above case as can be observed the Woolworths current ratio has been increasing
annually and downward trend has been noticed with Wesfarmers. However current ratio of
Woolworths is always less than 1, which indicates a sign of weakness. The liquidity of the same
is in a bad state and the company cannot meet even its day to day working capital requirements,
whereas for Wesfarmers the current ratio is above 1 throughout the years implying it has better
liquidity and can meet its day to day business fund requirements.

Quick Ratio:
Quick ratio or acid test ratio measures the ability of a company to use its near cash or quick
assets to extinguish or retire its current liabilities immediately. Quick assets include those current
assets that presumably can be quickly converted to cash at close to their book values. A
company with a quick ratio of less than 1 cannot currently fully pay back its current liabilities .

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For both the above companies the quick ratio is less than 1, therefore the companies will take
longer time to convert the debtors into cash whereas the creditors have to be paid before the
receivables are realized into cash, thus blocking the funds of the shareholders for variably longer
period than what is supposed to be happening.

.Account receivable to working capital:

This ratio describes how much the company is depending on collecting receivables for a steady
flow of working capital. A company should always have enough working capital irrespective of
other factors and hence a lower number is preferred for this ratio.

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The position of Woolworths seems to be deteriorating as the above stated ratio is negative,
whereas Wesfarmers seems to be making payments from the sales realization and not from the
company’s fixed funds

Inventory to working capital:

This ratio is an important indicator of a company’s operation efficiency. A low value of 1 or less
of inventory to working capital means that a company has high liquidity of current asset or it may
also mean insufficient inventories. A high value inventory to working capital ratio means that a
company is carrying too much inventory in stock. It is not favorable for management because
excessive inventories can place a heavy burden on the cash resources of a company. A key
issue for a company to improve its operation efficiency is to identify the optimum inventory levels
and thus minimize the cost tied up in inventories. A strong working capital management is key
for success and hence a lower number is advisable for this ratio.

Inventory for a co. should be justified according to the needs of the production, further now-a-
days the co.’s are adopting just in time policy which means they do not need to overstock and
bring in the raw material just at the time when it is needed for production.

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Again Woolworths shows its ratio in negative which means the company is in a really bad
position as it cannot even meet the current demand with stock of raw material and has to remain
deprived of production despite the high demand for its product, whereas Wesfarmers seems to
be in a better position and has sufficient inventory of raw material to meet the product’s demand.

Sales to working capital:

The Sales to Working Capital ratio measures how well the company’s cash is being used to
generate sales. Working Capital represents the major items typically closely tied to sales, and
each item will directly affect this ratio.

An increasing sales to working Capital ratio is usually a positive sign, indicating the company is
more able to use its working capital to generate sales. Although measuring the performance of a
company for just one period reveals how well it is using its cash for that single period, this ratio is
much more effectively used over a number of periods.

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This ratio can help uncover questionable management decisions such as relaxing credit
requirements to potential customers to increase sales, increasing inventory levels to reduce
order fulfillment cycle times, and slowing payment to vendors and suppliers in an effort to hold
on to its cash.

Based on the above observations Woolworths ratio is deteriorating whereas Wesfarmers is

improving over the years

OPERATING RATIOS:

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Days in Inventory:
Also known as 'Days Inventory Outstanding' or 'the Inventory Period' is an efficiency ratio that
measures the average number of days the company holds its inventory before selling it. The
ratio measures the number of days funds are tied up in inventory. Inventory levels divided by
sales per day.

Woolworth’s inventory holding is lesser than Wesfarmers implying that goods produced are
converted into sales or receivables earlier in the case of Woolworths than Wesfarmers thus
creating lesser blockage of funds in inventory.

Days in Receivables:
It is the length of time it takes to clear all Accounts Receivable, or how long it takes to receive
the money for goods it sells. This is useful for determining how efficient the company is at
receiving whatever short-term payments it is owed.

Again Woolworth’s funds tied up in accounts receivable is for a lesser number of days than that
of Wesfarmers, thus enhancing their liquidity position.

Days in Payables:
It is the length of time it takes to clear all outstanding Accounts Payable. This is useful for
determining how efficient the company is at clearing whatever short-term account obligations it
may have. In other words, it is the amount of time the suppliers continue financing the
company’s operations. The higher this number, the better for the company.

Comparing this with ‘Days in Receivables’ both companies have surplus time to pay back their
creditors.

Cash Conversion Cycle:

CCC is calculated using average inventories, average account payables and average account
receivables. It is based on the fact that both inventories and receivables is money that we need
in order to fund the company’s operations, whereas payables is considered as money that can
be used to fund these. This simply tells whether the company is paying off its short term
liabilities from its own funds, or from the funds realized after sales realization and that too
whether within minimum time after sales realization.

Woolworths seems to be efficient enough not to pay from own pocket and on time after the sales
realization, whereas Wesfarmers takes longer to pay its liabilities even after realizing the sales
proceeds which may result in losing benefits like early payment discounts etc.

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CAPITAL STRUCTURE RATIOS:

Debt to asset:

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This ration measures the proportion of a company’s asset which is related to asset or an extent
to which a company is financed using debt. This ratio is usually expressed as a percentage. The
higher the ratio becomes, the creditors are more vulnerable to financial risks. If the ratio is
greater than one, most of the company's assets are financed through debt. Companies with high
debt/asset ratios are said to be "highly leveraged," and could be in danger if creditors start to
demand repayment of debt. Only interest bearing debts are taken into consideration in this ratio
eliminating provisions, deferred tax liabilities, accounts payable to creditors etc.

In this case both Woolworths and Wesfarmers have less financial risk involved since their Debt
to Asset ratio is less than 1. However, 60% funding is done by creditors in Woolworths hence the
risk factor borne by the creditors is more compared to Wesfarmers as they have only 40%
funding by creditors.

Debt to equity:
The debt-to-equity ratio (D/E) is a financial ratio indicating the relative proportion of
shareholders' equity and debt used to finance a company's assets. Higher the debt to Equity
ratio the more chances of financial risks.

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In the above case both the companies seem to have a position above the benchmark but
Wesfarmers is seen to be stronger in comparison to Woolworths, as far as the liabilities and
equity is concerned Wes farmer investors have more of their capital invested than they have the
liabilities standing in the name of the company. However the opposite is in the case of
Woolworths, they have almost the same liabilities as the equity invested by the owners.

INVESTMENT VALUATION RATIOS:

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Earnings Per Share:

EPS value tells the shareholder on how much money each share of their stock earned by the
company. Usually, when a company has a high earning per share, it also has a high stock price
which makes investor happy.

Both the companies are offering almost the same rate to its shareholders.

Cash Flow Per Share:

Cash flow per share can be calculated by dividing cash flow earned in a given reporting period
by the total number of share outstanding during the same term. Because the number of shares
outstanding can fluctuate, a weighted average is typically used. This is mainly used to measure
the nature of the stream of return available to investors.

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Cash flow per share for Wesfarmers is more than Woolworths. Woolworth is the range of 2-3
whereas Wesfarmers is more than 3.

Net Asset Per Share:

This is a yardstick for measuring the performance of companies. The basic calculation of net
asset per share is total equity (total asset on the balance sheet less total liabilities) divided by
the number of equity share in issue.

The same is higher is case of Wesfarmers, thus the market price of Wesfarmers would be more
than that of Woolworth as investors have more asset backing and thus involve lesser risk

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CONCLUSION:
Woolworth is stable as far as outside payments are concerned. However with an overall
Weasfarmer is in a better position when It comes to day to day production and sales. Woolworth
is not sharp in realizing it payments from current assets and have burden of short term liabilities,
but their capital structure is stable, whereas for Wesfarmer’s the liquidity position is better in
comparison to capital structure.

Considering this in whole we prefer investing in Wesfarmer than Woolworth.

WHY WESFARMERS?

Woolworths and Wesfarmers have maintained their position in the top-20 highest grossing
retailers in the world, with a combined revenue of more than $US100 billion ($111 billion)
A survey conducted by Deloitte ranks the two retailers at 15th and 19th respectively, behind
world leaders Wal-Mart, Tesco and Costco.
The ranking takes Woolworths up two places and Wesfarmers down by one.
The survey is contained in a report into the global retail sector by the accounting company, and
is based on 2012 revenue figures.
Woolworth's revenue for 2012 was $US58.6 billion, making it the biggest Australian retailer in
the world, Deloitte says. This places it behind French multinational hypermarket chain Groupe
Auchan and Japanese retailer Aeon Co.
Wesfarmers, owner of Coles, followed close behind, with revenues of $US54 billion. It ranks
closely behind Amazon, which reported revenues of $US58.5 billion.
With that lack of direct comparison, the market average is actually a pretty good barometer for
Woolworths and Wesfarmers. Given their size and significant market share, they are unlikely to
grow at rates much faster than the average. Having said that, given Wesfarmers’ potential to
diversify into completely new lines of business, its growth profile is higher although so are its
risks.

Hence looking at all the market trends, we have decided to make a detailed financial analysis to
understand the companies in the longer run based on their 5 years working between the years
2010-15.

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http://clients1.ibisworld.com.au/reports/au/industry/majorcompanies.aspx?entid=1834#MP12688

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