EU CONSUMER STAPLES: Woolworths: FY results
(WOWAU; Baa2/BBB)
Australia's largest grocer reported earnings earlier this week that sent equities -15%, and new 32s +8bps on reported selling. The only fundamental concern is that sales growth is lagging main competitor Coles (a gap that seems to be widening from 2ppt growth diff. in 4Q to now 3ppt based on trading conditions). The equity move is exaggerated by RV (trailing P/E: WOW 25x, Coles 29.5x vs. ASX200 22x). Despite the trailing growth to Coles we would note Woolworths has the superior market share to start with (38% vs. 29%) and it has only been one year since a long-time CEO was moved out. More broadly for European investors we'd note co has superior profitability/margins (only rivalled by Walmart), has headroom on leverage to rating thresholds and guidance points to recovery in earnings. The shorter 28s, a line we have long-liked, has made top 10 total returns across consumer/transport YTD. If the sell-off continues in the €32s we will likely see value.
Aus. Food (nearly entire bottom line):
- 4Q sales +2.9% (of which pricing +0.1%) and left FY sales at $51.5b (€28.8b) +3.1%
- Competitor Coles reported 4Q +5.1% and FY +3.7%
- WOW sales momentum improved through the year despite flat prices in 2H
- e-commerce sales grew +17% and now makes up 15% of sales. 40% of 4Q deliveries were done within 2 hours. For competitor Coles it grew 24% and makes up 11% of sales.
- FY gross margin at 28.6% (-25bps) when combined with small opex inflation left EBIT margin at 5.4% (-82bps) or A$2.75b (€1.54b) -10.5% y/y. EBITDA was -4% y/y.
At group level:
- Aus. B2B added $137m in EBIT (+16% y/y), New Zealand Food $138m (+39% y/y) while Big W (discount department store) losses widened to -$63m (from -$29m LY).
- Net group wide gross margin was 27.2% (-7bps) while EBIT margin came in at 4.0% (-76bps) or $2.8b (-13% y/y).
- WC was favourable y/y to leave operating cash flows up and FCF net of lease payments at $1.4b, up from $0.95b last year.
- Previously declared/paid dividends were $1.7b (vs. $1.2b LY) - increase mainly on 40c ($0.5b) special dividend paid for past asset sale. It took net cash flow to neg. $0.7b.
- Net debt rose by similar $0.5b to $16b (including leases) leaving it 2.8x levered (vs. 2.6x LY). No stated target, but co has good history of BS governance. It is well below S&P's threshold of net 3.75x.
Guidance:
- Core Aus. Food EBIT to grow by mid to high single digit
- NZ Food growth to continue
- Big W to switch to EBIT and cash flow positive
- First 2 months of FY26 (July/Aug) saw Aus Food Sales +2.1% and ex Tobacco +4.0% (vs. Coles +5% and ex. Tobacco +7%)
- NZ Food +2.6%, Big W flat as it cycles clearance activity from LY
- Final dividend of 45c/share (-21% y/y) as it maintaining a 70-75% FY payout ratio
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EQUITY TECHS: E-MINI S&P: (U5) Bulls Remain In The Driver’s Seat
- RES 4: 6523.63 1.764 proj of the May 23 - Jun 11 - 23 price swing
- RES 3: 6500.00 Round number resistance
- RES 2: 6477.31 1.618 proj of the May 23 - Jun 11 - 23 price swing
- RES 1: 6457.75 High Jul 28
- PRICE: 6411.50 @ 14:18 BST Jul 30
- SUP 1: 6391.50/6322.32 Low Jul 24 / 20-day EMA
- SUP 2: 6241.00 Low Jul 16
- SUP 3: 6173.21 50-day EMA
- SUP 4: 6130.75 Low Jun 25
The trend set-up in S&P E-Minis remains bullish. Recent cycle highs once again confirm a resumption of the uptrend and maintain the price sequence of higher highs and higher lows. Note that moving average studies are in a bull-mode position highlighting a clear dominant uptrend. Sights are on 6477.31, a Fibonacci projection. Key support is at the 50-day EMA, at 6173.21. Support at the 20-day EMA is at 6322.32.
US TSYS/SUPPLY: TBAC Had Misgivings Over Buyback Optics, Rising Term Premia
It was interesting to see that the Treasury's private sector advisory group (Treasury Borrowing Advisory Committee, or TBAC) had misgivings over the optics of increasing longer-end liquidity buybacks as it could be seen as an adjustment of the maturity profile of privately-held debt. Indeed, the decision to up 10-20 and 20-30Y buyback sizes and not sizes across the curve didn't appear to be a unanimous recommendation. TBAC also suggested that it was possible to double the size of the buyback program within the requisite parameters and objectives. The full TBAC report to Treasury is here.
- In determining what buyback sizes to recommend, TBAC reiterated that "the Committee focused heavily on Treasury’s stated objective: liquidity support buybacks are not intended to change the overall maturity profile of debt outstanding." And "in order to quantify that, the Committee reviewed the 3y standard deviations of annual changes in WAM (2 months across all environments, 1 month across non-recessionary environments). The Committee noted that the current program, if executed fully at maximum sizes offered, shortens WAM by 0.4 months per year – well within the typical 1y change. The Committee felt that there was therefore capacity to double the program, if appropriate, without materially impacting WAM."
- However, "There was some debate among Committee members as to whether concentrating an increase in liquidity support buybacks in certain sectors of the curve could be misconstrued as WAM management, and for that reason many members felt a uniform increase across the curve, even though take up might routinely be below capacity, would be preferable. The majority of the Committee felt that they would be more comfortable recommending larger increases, or sectoral specific increases, if there was a more directly visible incorporation of the buyback program related funding needs into Treasury’s overall issuance decision."
- And "there was some discussion as to when weakness in certain sectors, as evidenced by the presenting member’s buyback score, warranted a buyback adjustment versus an issuance reconsideration. Regardless, the Committee felt that communication to the market was critical to ensure the program was not misconstrued to be active WAM management. Overall, the Committee felt there was scope to make the program larger and more responsive to evolving market conditions, while still being regular and predictable. However, it would be critical that Treasury monitor and adapt to any material buyback-driven change in debt distribution. The Committee feels strongly that issuance is the primary tool for managing the debt profile."
- The committee also noted that it could be a good time to reassess the "optimal debt structure" given a rise in term premia. Versus a Q3 2023 TBAC study: "term premium has increased modestly more than the scenarios considered, suggesting that a refresh of the optimal debt structure analysis could be beneficial. Additionally, the Committee discussed the fact that evolution in demand patterns suggests increased demand in front end and intermediate maturities relative to reduced demand in longer end maturities."
- Additionally, there appeared to be some debate about Treasury's forward guidance on coupon upsizing: "Given the breadth of uncertainty relating to both receipts and expenditures, the Committee was mixed on whether adjustment to Treasury’s expressed expectations of future changes was necessary."
EQUITIES: US Cash Opening Calls
US Cash Opening Calls, set for another steady Open as the Globe now waits for the FOMC.
- Calls: SPX: 6,384.0 (+0.2%); DJIA: 44,691 (+0.1%/+58pts); NDX: 23,368.4 (+0.3%).
