Spag bol, again

RESULTS ANALYSIS

Need To Know

• Australian Food EBIT +19% in FY23, margin hits 6.0%.
• Costs are rising in FY24.
• WOW performing solidly in a very tough period for some of its customers.

Investment Implications

FY23 results overview (vs consensus):

Revenue $64.3bn vs $64.0bn

EBIT $3.12bn vs $3.11bn

Australian Food EBIT $2.87bn +19.1% on pcp vs $2.82bn

Net profit $1.72bn, in-line with market

A positive 2H23 carried WOW reported FY23 EBIT up 16% to $3,116m slightly ahead of what the market expected. Food EBIT margins reached 6.0% as EBIT increased 20% in 2H23 (+19% FY23). NZ Food seems to have stabilised in 2H23 after severe weather hurt the 1H23 result, and BIG W margins were very weak in 2H23.

Australian Food delivered a very good result in FY23 with EBIT up 19% to $2,865m and margin reaching 6.0% for the first time since FY15. The four-year compound annual growth in EBIT was 8.4% indicating WOW has done very well through the pandemic despite some heavy costs to manage daily operations in that period. Now with inflation having pumped up sales and earnings, the company is acutely aware of the ‘Saver Families’ watching every penny in their trolley. As prices ease on meat and fresh fruit and veges, the market will take care of some of the pressure, but WOW is also under some pressure to look after its market share and margin.

BIG W ran into a wall in 2H23 as customers spent less and competition in the sector (discounts and promotions) were rampant. BIG W reported 2H23 EBIT of just $11m (FY23 EBIT $145m) on sales of $2bn for the half year (FY23 sales $4.8bn).

Outlook. Sales in the first 8 weeks are mirroring the 4Q23 outcome of +6.4% comparable store sales growth in Australian Food. BIG W sales are down -6% and NZ Food is up 4.5% in the same period.

Rising costs are high on management’s agenda for FY24 as wages (+5.75% plus 0.5% super, NZ wages +7%), energy and transport costs lift. With a softening sales outlook, higher costs could mean downside for consensus EBIT forecasts. The group wage bill is increasing by $400m in FY24.

Investment View

WOW’s cautious outlook commentary is playing a careful game against the backdrop of a hard hit customer base. Group Chair Scott Perkins said the company was “particularly focused on addressing the cost-of-living pressures experienced by our customers and team”. Shareholders, however, received a nice 9% bump in the final dividend to 58cps fully franked.

Although the early trading in FY24 remains good, we expect a tight year for WOW as sales growth diminishes and margins feel the squeeze from cost growth. At 24x FY24 PER, we retain our Hold recommendation.