Woolworths PAST JOB

UNIVERSITY OF TECHNOLOGY SYDNEY Graduate School of Business
22743 BUSINESS VALUATION AND FINANCIAL ANALYSIS
Group Assignment
OCTOBER SESSION
Report to:
PROFESSOR ZOLTAN MATOLSCY Case Study: Woolworths

Student Name Brent HENLEY Peter HOWE Christian ORITZ Zhiming YE Prepared by: Student Identification
10388039 02130033 03005802 10669428
ASSIGNMENT DUE 21 October 2009
Table of Contents
Woolworths Limited: Case Study ............................................................................. 3 Executive Summary .................................................................................................. 3 Restating Financial Statements ................................................................................. 4 Industry and Business Strategy Analysis .................................................................. 4 1. Industry Analysis............................................................................................... 4 2. Business Strategy Analysis ............................................................................... 6 Accounting and Financial Analysis ........................................................................... 6 Measuring overall profitability.............................................................................. 7 Assessing Operational Management ..................................................................... 8 Woolworths Limited Profit and Loss and Balance Sheet Forecast 2009 to 2014 .. 8 Profit and Loss ...................................................................................................... 9 Balance Sheet ........................................................................................................ 9 Valuations................................................................................................................ 10 Sensitivity Analysis ................................................................................................. 11 Assumption 1....................................................................................................... 11 Assumption 2....................................................................................................... 12 Recommendation ..................................................................................................... 12 Appendix ................................................................................................................. 13
Woolworths Limited: Case Study

Executive Summary Woolworths Limited is a diversified retailer with principal operations in Australia and New Zealand. The company is recognised as one of the top five retailers in the world with major brands in Australia that includes Woolworths and Safeway supermarkets, Woolworths and Safeway Liquor, Caltex/Woolworths Petrol, Dick Smith Electronics, Powerhouse, Tandy, BWS, Dan Murphy's and BIG W. The company has successfully leveraged its economies of scale to dominate and gain a competitive edge over its rivals in Australia and has consistently recorded double-digit sales revenue and a stable ROE to its shareholders. To continue this impressive momentum of sales growth, Woolworths has embarked on entering the hardware market in Australia, it has recently entered the organic food market by acquiring the well-known Macro organic brand and plans to expand its operations in emerging markets like India. However, it also faces more intense competition from its rivals Coles, IGA, Aldi and other smaller boutique food retailers. It must also weather the macroeconomic factors like rising interest rates, fuel prices and employment uncertainty that directly affect consumer confidence and spending. These key challenges do pose a genuine threat for Woolworths to sustain its competitive edge. The purpose of this case study is to provide a comprehensive analysis and valuation of Woolworths. We have conducted a thorough review of its business operations, the industry it participates, performing key ratio and sensitivity analysis and applying the relevant forecasting and valuation models in order to formulate an opinion on whether it is able to sustain this growth and recommend whether it is a buy, hold or sell stock to investors.
Restating Financial Statements Woolworths Limited is the largest retail company in Australia by market capitalisation and sales, which consist of food, liquor, petrol, consumer electronic products and general merchandise, with over 75% of group sales and EBIT, coming from the sale of food and liquor. The key success factors for Woolworths Limited are to maintain its market leadership as well as continuing to invest in new stores across both geographical and key demographical growth areas to deliver sustainable profits well into the future. In order to evaluate effectively the degree to which Woolworths accounting captures the organisations underlying business performance there is a need to analyse the financial statements including the profit and loss, balance sheet and cash flow. In order to facilitate this analysis it is necessary to restate the profit and loss and the balance sheet to ensure consistency of classification and format which if not kept consistent year on year can make it difficult to compare performance over an extended period of time. The analysis involves looking for any distortions or inconsistencies in Woolworths financial information that may have an impact on the sustainability of profit. To restate the financials of an organisation such as Woolworths there are three main elements: determine the operating assets and liabilities, determine the financing assets and liabilities and finally re-format the profit and loss to determine the net operating profit after tax or NOPAT. For Woolworths Limiteds reformatted financials for the period 2006 to 2008 please see Appendix 1. Industry and Business Strategy Analysis Strategy analysis is an important starting point for analysis of the financial statements of Woolworths as it allows you to probe the economics of a firm at a qualitative level so that subsequent accounting and financial analysis is grounded in business reality. In analysing a firms profit potential, one has to first assess the profit potential of each of industries in which the firm is competing because the profitability of various industries differs significantly over time. As such the following is a detailed industry and strategic analysis of the Woolworths business.
1. Industry Analysis
Woolworths is perceived to be in a recession-proof industry in both the global and local economies in which it operates. The company has maintained steady growth during the current economic downturn and it is likely to maintain steady growth in the future.1 (See Appendix 2 for full details) Five Forces Analysis
FinAnalysis, http://www.aspectfinancial.com.au.ezproxy.lib.uts.edu.au/af/company/mainview?ASXCode=WOW, viewed on 2 October 2009
The below five forces (Porter, M. (1979)) will be used to analyse the industries in which Woolworths operates. Force Factors Rivalry Among Existing Firms Fierce competition exists in the industries in which Woolworths operates as customers are price sensitive and the core products supplied are relatively undifferentiated. (Appendix 3 for market revenue share) Threat of New Entrants Due to the cancellation of the anticompetitive leasing provisions within large shopping centres, new entrants to the industry will find it easier to enter the market but must have sufficient capital and cash flow to maintain competitiveness on a continuous basis. (Appendix 4) Threat of Substitute Products Customers have the option to switch as competitor supermarket chains like Coles and Aldi offer similar products at comparative pricing. Bargaining Power of Buyers Consumers have very little bargaining power due to the significant market share held by the major supermarkets, however it must be noted switching costs between the major supermarkets is relatively low Bargaining Power of Suppliers Suppliers have relatively low bargaining power as all product lines within Woolworths have substitutes and suppliers compete on price to maintain market share and shelf space Industry Analysis of Commercial Issues The industry commercial issues will also be used to analyse Woolworths sales, COGS and long-term growth prospects. (See Appendix 5 for further details) Commercial Issues Cancellation of the anti-competitive leasing provisions in Woolworths leases. Aldi, Coles and other competitors selling substitute products at lower prices. Consolidation of Woolworths distribution centres Natural disaster in Australia Sales _ COGS + Long-term Growth _
+ _
_ +
+ _
2. Business Strategy Analysis
Business Monitor International (2009) highlights that Woolworths plan to add 15-25 supermarkets annually into the foreseeable future as it has done over the past few years. The business has consolidated its 31 distribution centres into nine regional and two national centres so as to improve efficiency. The liquor business with pub and hotel acquisitions will be diversified due to the higher-growth prospects. Further, Woolworths overseas expansion will continue after its acquisition of Foodlands New Zealand operation. Across 2009, Woolworths will give its priority to developing financial services products, which are very much outside its core operations.2 As per Datamonitors report, the large store network and the improved supply chain capabilities are two of Woolworths key success factors. Woolworths has more than 3,100 stores across Australia and New Zealand and uses its large store network to enhance its market penetration in order to gain a competitive edge over its peers. Furthermore, Woolworths has well developed an end-to-end supply chain program for its supermarkets that enables the organisation to save costs and enhance efficiency at its distribution centres.3 Datamonitor (2009) indicates that Woolworthss key risks include short supply of fresh food and changes in government regulations. February 2009 witnessed the natural disasters in South Australia and North Queensland, which significantly affected on the supply of fresh food to supermarkets. The impact will vary in coming months and Woolworths cost base and sales potential may be affected. On the other hand, Woolworths has to allocate resources to changing government regulations and standards regarding the pricing of its products, food licensing, operation of the facilities relating to the storage and dispensing of products.4 Finally, further competitors like Aldi and IGA can enter the market after the cancellation of anti-competitive leasing provisions. Based on the above analysis, Woolworths is perceived as a recession-proof company whose revenue and profit will continue to increase year on year despite the global financial crisis. Accounting and Financial Analysis Ratio analysis has been conducted from the financial years 2006 to 2008 for Woolworths Limited and in some instances for a competitor organisation, Wesfarmers who wholly own Coles Supermarkets. Detailed analysis of the key profitability and operational management drivers of the business are outlined below. Considerable effort has also been focused on completing ratio analysis for efficiency measures, being inventory turnover as an example, as well as the measurement of financial leverage utilising both short-term and long-term liquidity. These items have been included in Appendix 6.
Business Monitor International, Australia Food and Drink Report - Q4 2009. (2009, October). Australia Food and Drink Report, p.65, Retrieved October 2, 2009, from ABI/INFORM Trade & Industry. (Document ID: 1864724811).
3
2009. "DATAMONITOR: Woolworths Limited." Woolworths, Ltd. SWOT Analysis, pp. 5-6, Business Source Premier, EBSCOhost (accessed October 2, 2009). 4 ibid., pp. 7-8
Measuring overall profitability Ratio Return on Operating assets (RONA) Net Financial Leverage Spread Return on Equity (ROE) 2006 17.6% 2007 16.7% 2008 19.4% WES 2008 17.9
115.5%
78.9%
54.2%
82.9%
10.39% 32.4%
9.49% 26.5%
12.19% 27.7% 5.36%

(WOW (2006, 2007, 2008), Wesfarmers (2008))
The Return on Equity (ROE) for Woolworths indicates how well managers of the various segments are employing funds to generate sufficient returns to shareholders. ROE in 2008 was 27.7% which was an increase on the 2007 result of 26.5%. When comparing ROE to its peers, Wesfarmers ROE in 2008 was 5.36%, which was significantly lower. However, Wesfarmers only acquired Coles in mid 2008, so ROE is not on a full year basis. When compared to the 2008 S&P 500 companys average of 12.9%, Woolworths is by far superior. The table above also displays Return on Net Operating Assets (RONA), Net Financial Leverage (debt to equity) and Spread. RONA is a measure of how well management are deploying assets to generate operational profits for the firm. In the case of Woolworths, the RONA in 2008 was 19.4%, this was marginally better than 2007 and 2006 at 16.7% and 17.6% respectively. Key factors for the consistent and positive RONA returns are attributed to Woolworths efficient supply chain management, store expansion and progressive refurbishment programme. Spread is the economic effect from introducing debt into capital structure. For the period between 2006 and 2008 the return on operating assets was greater than the cost of borrowing. Woolworths used both debt and operating revenues to fund store expansion and refurbishment activities. It was able to cover the interest through the consistent earnings over the same period. This programme has provided an opportunity for Woolworth to take a competitive advantage over other Retailers by driving top-line sales. The net financial leverage is driven by Woolworths finance policy and it is clear that debt is being consistently used year on year to fund refurbishment programmes as well as acquisitions across all business sectors.
Assessing Operational Management Ratio Gross Profit Margin Total expense % EBITDA Margin EBIT Margin NOPAT Margin 2006 25.3% 84.9% 5.9% 4.5% 3.1% 2007 25.5% 95.1% 6.3% 4.9% 3.4% 2008 25.5% 94.7% 6.8% 5.3% 3.7% 3 Year Average 25.4% 91.5% 6.3% 4.9% 3.4%
(WOW (2006, 2007, 2008))
Gross profit margin averaged about 25.4% across 2006 to 2008. This indicates sales revenue growth was in line with cost of goods sold. Sales growth in 2008 slowed slightly from prior years, which is due to increase competition from Coles, IGA, Independent grocers, specialty food stores and new players like Aldi. A high degree of discounting persists in the market place however, Woolworths has tended to absorb these price wars together with cost pressures from suppliers in its gross profit margin. Over the period 2006 to 2008 total expenses as a percentage of sales has increased, which may indicate Woolworths has cost pressures including rising labour costs and fuel prices putting pressure on distribution costs. NOPAT margin provides a good indication of operating performance. Woolworths NOPAT margin increased moderately from 3.1% in 2006 to 3.7% in 2008. The EBITDA margin provides a similar indication of operational performance and for Woolworths this ratio has improved year on year from 2006. Non-financial measures provide a good indication of a companys internal efficiency and how effective these efficiencies translate into performance. For Woolworths, they may include measures such as reducing staff turnover, lost time due to injury, tracking performance in stores and areas of logistics, shrinkage or dumping of inventories (short life versus long life) per store, food and safety compliance measures, inventory per floor space (per square meter) and sales per square metre (sqm). (See Appendix 7 for full details). Also included is a detailed SWOT analysis for reference and further analysis on the Woolworths organisation. (See Appendix 8). Woolworths Limited Profit and Loss and Balance Sheet Forecast 2009 to 2014 Woolworths is perceived to be in a recession-proof industry in the local Australian economy with the company maintaining steady growth during the current economic downturn and it is likely to maintain steady growth in the future. Based on this information and the fact that Woolworths has been well established within the Australian market since 1924, it has been decided to utilise a Type 1 financial forecasting model including strong focus on the following elements of the P&L and Balance Sheet. (See Appendix 9 & 10 for full financials and forecasting analysis)
Profit and Loss Woolworths Limiteds historical financial performance has been sound across 2006-2008 delivering double-digit year on year revenue growth. Current year trading in 2009 has been impacted by the global financial crisis, which has also impacted various levels of the local economy, as well as negatively impacting consumer confidence and retail spending. With local and international economists predicting a continuation of the uncertainty around global markets across 2010, the revenue forecast presented for Woolworths has been limited to 8% year on year growth from 2010 to 2014. This growth expectation is both conservative and prudent in the current economic climate but also represents a challenge for the operational leaders of the Woolworths business to deliver across the next five years. Woolworths Limiteds expenses as a percentage of revenue have averaged 91.50% across 2006-2008, however the final result for 2008 has seen an increase to 94.66% due to the change in economic conditions experienced around the globe. As an example, rising fuel costs have significantly impacted Woolworths expenses through increased freight charges. However, with an expectation of increased focus on controllable expenses as was the case from 2008 to 2009, which saw expenses reduce from 94.66% of revenue to 94.4%, expenses have been forecasted at 93.9% of revenue across 2010-2014. Woolworths Limited has remained profitable across the period from 2006 to 2008, delivering 3.7% Net operating profit after Tax as a percentage of sales. In 2009 the organisation delivered an improved NOPAT result to 4.1% of revenue. With a continued focus on the management of expenses and top line revenue growth as discussed previously, NOPAT has been forecasted across 2010-2014 at 4.2% of revenue. Balance Sheet The balance sheet of Woolworths Limited is very sound with a dividend policy of 60% of net profit returned to shareholders as dividends, with the remainder retained in the balance sheet thereby enabling directors to deliver investment opportunities in future periods. To forecast the various elements of the balance sheet for Woolworths across 2010 to 2014 an historical perspective has been utilised as follows: Current Assets 9% YonY growth Current Liabilities 11% YonY growth Non-Current Assets PPE 10.8% / Other 11.2% YonY growth Non-Current Liabilities 1.1% YonY growth
Valuations There are a number of valuations methods available to analysts to determine a value of a business or company: 1) Discounted Cash Flow Method a. NTA Terminal Value b. Residual Income Terminal Value Multiplier Method Net Asset Method Less used is the Dividend Discount Model
2) 3) 4)
The two types of valuation methods used in this case study will be the Discounted Cash flow Method using the free cash flows to generate the terminal value and the Discounted Residual Income Method based on the Residual Income and RI Terminal value. Both methods can be used to value the company at the equity level or at the firm or enterprise level. The difference between the two is the equity level is the remaining balance after all the other stakeholders have been paid. The balance is known as the shareholders equity hence the name of the model. This model uses the required rate of return for equity as the basis of the discount back to present value. In order to calculate the approximate required rate of return for equity there are 3 factors to be combined: 1) 2) The risk free rate for the given period of time; a. In this case approx 5yrs The Beta of the company to be valued; a. The Beta is the correlation between the returns the company and the returns of a given market index, in Woolworths case the Beta is 0.71 (per Yahoo Finance) This is then multiplied by a risk premium, the Risk Premium compensates the investors for the level of risk they are taking. This percentage is generally between either 3-4% or on a historical average of 6-7%.
3)
In this case study it has been determined that the required rate of return is 9.35% This is the result of the risk free rate being 5.09% + Beta 0.71 x the risk premium of 6%. The risk free rate is determined by the yield on the 2.5yr and 9.5 yr bond interpolated to 5 yrs. The risk premium is the lower end of the long-term industry average. To value a business at the firm or enterprise level, the weighted average cost of capital or WACC needs to be calculated. In order to obtain the required information to calculate the WACC the re-formatted balance sheet is used to break down the percentage weighting of the borrowing verse the share capital over the net operating assets. Once this has been completed the weighting is multiplied by the after tax interest cost plus the weighted cost of equity or required rate of return. For Woolworths it is calculated as being 7.21%. (See Appendix 11 for further details). The four valuation methods used have generated an interesting price range for Woolworths Limited:
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1)
Residual Income Equity Method (See Appendix 12) a. $26.49 based on 3.25% growth and 9.35% required rate b. $23.53 based on 2.00% growth and 9.35% required rate c. $20.44 based on 0.00% growth and 9.35% required rate
2)
Residual Income Firm Method (See Appendix 13) a. $37.89 based on 2.70% growth and 7.21% WACC b. $31.21 based on 2.00% growth and 7.21% WACC c. $27.33 based on 0.00% growth and 7.21% WACC
3)
Discounted Cash Flow Model Equity (See Appendix 14) a. $19.10 based on 3.00% growth and 9.35% required rate b. $16.14 based on 1.50% growth and 9.35% required rate c. $14.13 based on 0.00% growth and 9.35% required rate
4)
Discounted Cash Flow Model Firm (See Appendix 15) a. $32.51 based on 3.25% growth and 7.21% WACC b. $24.19 based on 1.75% growth and 7.21% WACC c. $18.85 based on 0.00% growth and 7.21% WACC
Using the closing price as at 19 October 2009 of $30.52 (ASX.com.au) as an indicator, the residual income firm model with 2% growth appears to be in line with the current market expectations of the company. Sensitivity Analysis The above results were based upon data extracted from utilising the standard type 1 forecast model. In order to determine if Woolworths is price sensitive some testing was carried out by adjusting some of the parameters used as inputs into the forecasting model. Assumption 1 Using the information gathered in the industry analysis above, one assumption was to increase the COGS based upon the pending cancellation of the anti-competitive leasing provisions in Woolworths leases and the potential for natural disasters in Australia. It was evident that the impact of a small change to total COGS in the valuation models can cause the share price in all the valuation models to move exponentially. For instance, if the increases in COGS is 1%, the result would be a drop of $4.43 per share price in Residual Income Equity Method (assuming all other parameters per 1b), a $3.66 drop per share in Residual Income Firm Method (assuming all other parameters per 2b), a $3.32 drop per share in Discounted Cash Flow Method Equity (assuming all other parameters per 3a) and a $8.36 drop per share in Discounted Cash Flow Model-Firm (assuming all other parameters per 4a).
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This analysis confirms that the Woolworths shares price is highly sensitive to fluctuations in the cost of goods sold. This does not mean that Woolworths would be alone in the industry, as changes in the supply environment would affect all members of the industry. For example, a flood in Queensland may result in all supplies of bananas to mass-market retailers costing more. (See Appendix 16 for full details) Assumption 2 As there are more companies entering the industry, there will be fiercer competition for the consumer dollar. This may result in driving selling prices lower and reducing revenue for the companies in the industry. The second assumption was to decrease the sales revenue due to new entrants in the market. By decreasing revenue across all revenue streams by 1% there is a mixed result from the different models. For example, the decrease in revenue by 1%, would result in a drop of $0.72 per share price in Residual Income Equity Method (assuming all other parameters per 1b), a $1.83 increase per share in Residual Income Firm Method (assuming all other parameters per 2b), a $0.53 drop per share in Discounted Cash Flow Method Equity (assuming all other parameters per 3a) and a $0.71 increase per share in Discounted Cash Flow Model-Firm (assuming all other parameters per 4a). This analysis shows that Woolworths share price is not as sensitive to fluctuations in revenue as it was to fluctuations in cost of goods sold. (See Appendix 17 for full details). The above sensitivity analysis has shown that Woolworths is sustainable as long as costs are contained across the near future. Recommendation Based upon the detailed analysis conducted above, our recommendation would be to buy and hold Woolworths shares as the organisation has a sustainable competitive position in the Australian retail industry.
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References
AFR.com.au, Bonds higher as demand picks up, http://www.afr.com/home/viewerSearch.aspx?ATL://1255067335128&keywords=bo... accessed 11th October 2009 ASX.com.au, http://www.asx.com.au/asx/markets/priceLookup.do?by=asxCodes&asxCodes=wow accessed 19th October 2009 BARROWCLOUGH, Anne. (2009, March 5). Australian GDP slips. The Times,51. Retrieved October 2, 2009, from ProQuest Newsstand. (Document ID: 1655793951). Business Monitor International, Australia Food and Drink Report - Q4 2009. (2009, October). Australia Food and Drink Report, p.65, Retrieved October 2, 2009, from ABI/INFORM Trade & Industry. (Document ID: 1864724811). Datamonitor, 2009. "DATAMONITOR: Woolworths Limited." Woolworths, Ltd. SWOT Analysis, page 4, Business Source Premier, EBSCOhost (accessed October 2, 2009). Datamonitor, 2009. "DATAMONITOR: Woolworths Limited." Woolworths, Ltd. SWOT Analysis, pp. 5-6, Business Source Premier, EBSCOhost (accessed October 2, 2009). EconomyWatch, (2009), Australias Economic Conditions, http://www.economywatch.com/economic-conditions/Australia.html - accessed 21st October 2009 FinAnalysis, http://www.aspectfinancial.com.au.ezproxy.lib.uts.edu.au/af/company/mainview?ASXCode= WOW, viewed on 2 October 2009 Globalmarkets, www.globalmarketsandcompanies.com Herald Sun (Melbourne, Australia), 2 October 2009, 2nd Edition, p. 37 ibid., pp. 7-8 LINDSAY, Nicole. "ACCC ACHIEVES MAJOR BREAKTHROUGH ON SUPERMARKET COMPETITION - Giants end lock-outs." Herald Sun (Melbourne, Australia) 19 Sep. 2009, 1 - FIRST, BUSINESS: 089. NewsBank. Web. 2 Oct. 2009. news.com.au, http://www.news.com.au/business/story/0,,26091108-5017676,00.html accessed 2nd October 2009 Porter, M. (1979), How Competitive Forces Shape Strategy, Harvard Business Review 57, no. 2, pp.137-45. Weekend Australian (Australia), 26 September, 2009, Blair Speedy, p. 27, Finance Section
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Wesfarmers (2008), Wesfarmers Annual Report 2008, http://thomson.mobular.net/thomson/7/2802/3518/ - accessed 21st October 2009 WOW (2009), Preliminary Final Report Woolworths Limited 2009, http://media.corporateir.net/media_files/irol/14/144044/preliminaryfy09.pdf - accessed 21st October 2009 WOW (2008), Woolworths Limited: 2008 Annual Report, http://library.corporateir.net/library/14/144/144044/items/312267/FinalAnnualReport08.pdf - accessed 21st October 2009 WOW (2007), Woolworths Limited: 2007 Annual Report, http://library.corporateir.net/library/14/144/144044/items/268152/wol137+ar07_fa_r.pdf - accessed 21st October 2009 WOW (2006), Woolworths Limited: 2006 Annual Report, http://library.corporateir.net/library/14/144/144044/items/236944/AR2006.pdf - accessed 21st October 2009
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Appendix
Appendix 1: Woolworths Limiteds reformatted financials for the period 2006 to 2008 Profit and Loss
Woolworths Limited (WOW) Reformatted Financial Statements

2005 Revenues Food & Liquor Petrol Big W Consumer Electronics Hotels Wholesale Total Sales Revenue Other Income Total Revenue Expenses Cost of Goods Sold Branch Expenses Administration Expenses Total Expenses 2006 2007 2008
23,569.6 3,308.4 2,908.7 1,007.5 415.8 142.5 31,589.1 0.0 31,589.1
28,063.0 4,390.4 3,119.1 1,167.1 849.9 144.7 37,978.2 0.0 37,978.2
31,685.0 4,836.8 3,465.2 1,310.2 1,032.1 147.8 42,726.8 0.0 42,726.8
34,670.7 5,642.1 3,915.9 1,530.6 1,113.4 162.1 47,322.1 0.0 47,322.1
23,678.9 5,029.9 1,578.2 30,287.0
28,388.7 6,099.0 1,768.3 36,256.0
31,832.8 6,781.2 2,001.5 40,615.5
35,257.8 7,330.5 2,205.0 44,793.3
Net Operating Profit From Ordinary Activities
1,302.1
1,722.2
2,111.3
2,528.8
Inter-Company investment Profits Abnormal Items
-1.0 0.0
-12.1 0.0
-17.3 0.0
-24.7 0.0
Net Operating Profit Before Tax (NOPBT) Tax on Operating Profit Net Operating Profit After Tax (NOPAT) Interest Expense Net Expense Tax Shelter Interest Expense After Tax
1,301.1 379.8 921.3
1,710.1 520.7 1,189.4
2,094.0 636.5 1,457.5
2,504.1 743.4 1,760.7
150.1 -45.0 105.1
249.7 -74.9 174.8
233.6 -70.1 163.5
191.3 -57.4 133.9
Net Profit After Tax (NPAT) Extraordinary Non-operating Items Net Profit after Tax and Extraordinary Items
816.2 0.0 816.2
1,014.6 -329.8 684.8
1,294.0 263.8 1,557.8
1,626.8 -130.6 1,496.2
(WOW (2006, 2007, 2009))
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Appendix 1: Woolworths Limiteds reformatted financials for the period 2006 to 2008 Balance Sheet
Woolworths Balance Sheet Operating Assets and Liabilities Current Assets Cash and cash equivalents Trade and other receivables Inventories Prepayments Other Assets Current Liabilities Trade and other payables Current tax liabilities Provisions Other Net Current Assets Non Current Assets Trade and other receivables Investments - Equity Property, plant and equipment Intangibles Deferred tax assets (Future Income Tax Benefit) Non Current Liabilities 2 Provisions - Employee and Other Other Net Operating Assets (NOA) Financing Activities Borrowings - Current Borrowings - Non Current Derivative financial assets - Current Derivative financial liabilities - Current Derivative financial liabilities - Non Current Net Financial Obligations 2005 2006 2007 2008
433.8 487.2 1,969.6 108.4 65.4
525.9 1,048.2 2,316.1 112.2 115.6
798.8 379.7 2,739.2 105.0 96.9
754.6 455.2 3,010.0 182.6 34.7
2,857.0 105.5 523.5 59.1 -480.7
3,511.5 84.6 604.0 61.9 -144.0
4,184.7 212.9 650.5 0.0 -928.5
4,737.7 330.2 677.2 67.2 -1,375.2
16.2 1.1 3,359.3 2,046.4 287.7
14.0 59.5 4,055.8 4,759.4 336.9
5.4 256.0 4,623.0 5,003.5 367.2
3.6 262.0 5,638.8 4,835.2 430.7
290.0 93.9 4,846.1
340.7 99.1 8,641.8
382.3 98.2 8,846.1
380.0 134.1 9,281.0
235.5 2,610.4 0.0 0.0 0.0 2,845.9
612.3 3,704.0 -2.8 0.0 70.7 4,384.2
379.8 2,690.9 -41.4 74.9 227.2 3,331.4
550.2 2,224.0 -65.1 61.9 274.7 3,045.7
Equity Share capital Reserves Retained Profit Minority Interests
878.8 31.6 1,063.8 26.0 2,000.2
2,860.7 -288.6 1,455.7 229.8 4,257.6
3,351.1 -26.5 1,962.5 239.4 5,526.5
3,567.1 -133.9 2,559.7 242.4 6,235.3
Reconciliation of Book Value of Equity Opening Book Value of Equity CSP div Change in MI Closing Book Value of Equity Check 2,000.2 684.8 -1,368.8 203.8 4,257.6 0.0 4,257.6 1,557.8 298.5 9.6 5,526.5 0.0 5,526.5 1,496.2 790.4 3.0 6,235.3 0.0
(WOW (2006, 2007, 2009))
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Appendix 2 In the past financial year 2008, the global financial crisis has heavily hit Australias economy. Australian GDP shrank by 0.5 percent in the December quarter of 2008 and rose only 0.3 per cent over 2008. (Barrowclough , 2009)5 But, most of the items Woolworths sells are daily consumable products. Woolworths revenue hasnt been affected by the downturn of global and Australian economy, as all Australian people have to consume their products daily. Based on Datamonitors recent report, Woolworths has recorded revenues of A$47,158.1 million in the financial year ended June 2008, which was 10.7% higher than 2007. Its operating profit was A$2,528.8 million during the FY2008, which represents an increase of 19.8% over 2007. (Datamonitor , 2009)6 In addition, the global economy is forecasted to be on the way to recover. Herald Sun (2009) mentioned that the International Monetary Fund had expected Australias GDP would grow by 0.7 per cent instead of the previous 0.5 per cent while the Australian jobless rate would peak at only 7 per cent next year.7 Woolworths also predicted a further 11% rise in profit this year. (Speedy, 2009)8
Appendix 3
Coles and Woolworths dominate the Australian supermarket landscape. Graphic: news.com.au From: http://www.news.com.au/business/story/0,,26091108-5017676,00.html, viewed on 02 October 2009
Anne Barrowclough. (2009, March 5). Australian GDP slips. The Times,51. Retrieved October 2, 2009, from ProQuest Newsstand. (Document ID: 1655793951).
6
2009. "DATAMONITOR: Woolworths Limited." Woolworths, Ltd. SWOT Analysis, page 4, Business Source Premier, EBSCOhost (accessed October 2, 2009). 7 Herald Sun (Melbourne, Australia), 2 October 2009, 2nd Edition, p. 37 8 Weekend Australian (Australia), 26 September, 2009, Blair Speedy, p. 27, Finance Section
17
Appendix 4 Lindsay (2009) explains that Coles and Woolworths agreed to not to include the anticompetitive leasing provisions, which can keep each other and other full-line supermarkets out of shopping centres, in any new supermarket leases and the relevant provisions in existing leases would not be enforced if the lease was more than five year old.9 That means we can expect more and more supermarket chains enter the market and the competition within the industry will become fiercer. Appendix 5 Cancellation of the anti-competitive leasing provisions in Woolworths leases More and more competitors enter into market due to the cancellation. Consequently, Woolworths sales will decrease and COGS will increase as Woolworth needs to allocate extra resources to cope with the competitors and the competitor can probably take the market share from Woolworths. Therefore, the long-term prospect of Woolworths will be poor from this aspect. Aldi, Coles and other competitors sell similar quality products at competitive prices. Now Woolworths competitors like Aldi and Coles are able to provide the similar quality products, which are not well known in the public, at competitive prices. For customer, they would like to buy the competitors products if the items are in good quality in accordance with the relevant consumers survey. So, it would cause the decrease in Woolworths sales and the increase in Woolworths COGS, and they lead to the poor long-term prospect of Woolworths. Consolidation of Woolworths distribution centres Woolworths has consolidated its 31 distribution centres into nine regional and two national centres recently. This action will improve work efficiency and reduce costs in Woolworths. Hence, Woolworths sales will increase while its COGS will decrease, and the long-term prospect of Woolworths will be good. Natural disaster in Australia In the past one-year, natural disasters in Australia have affected the supply of fresh food to supermarkets. The supply shortage has caused the decrease in Woolworths sales and the increase in its COGS. The long-term prospect of Woolworths would be poor if the similar disasters happened again.
Nicole Lindsay. "ACCC ACHIEVES MAJOR BREAKTHROUGH ON SUPERMARKET COMPETITION - Giants end lock-outs." Herald Sun (Melbourne, Australia) 19 Sep. 2009, 1 - FIRST, BUSINESS: 089. NewsBank. Web. 2 Oct. 2009.
18
Appendix 6 Efficiency ratios Ratio Operating Working Capital Turnover Accounts Payable Turnover Inventory Turnover PPE Turnover 2006 5.63 2007 4.89 2008 5.22 3 Year Average 5.25
8.08
7.61
7.44
7.71
12.26 10.24
11.62 9.85
11.71 9.22
11.86 9.77
(WOW (2006, 2007, 2008))
Asset turnover for Woolworths highlights how many dollars it can generate for each dollar invested in working capital. The operating working capital for Woolworths has been relatively stable over the past 3 years at an average of around 5.246. This indicates that Woolworths has effectively managed its working capital by leveraging more bargaining power and receive better control of its supplier/distributor contracts. It also indicates efficient supply chain management through its national logistics and distribution centres that enables Woolworths to assert more control of working capital. Accounts Payable turnover has decreased over the period from 8.084 to 7.442 between 2006 and 2008. This indicates, Woolworths firm control over its suppliers and of taking advantage of trade credit. This is supported by a favourable decrease of inventory management turnover over the same period indicating that suppliers are helping finance Woolworths growth. Note that the inventory turnover is much lower for Supermarkets than the group in total. The PPE turnover has also decreased moderately from 10.243 to 9.223 over the 2006 and 2008 periods. This highlights Woolworths is efficiently utilising its long-term assets to increase sales growth, which is evident through its planned refurbishment programme designed to increase both volume and sales. Financial Leverage Short-term liquidity Ratio Current Ratio Quick Ratio Cash Ratio Operating cash flow ratio 2006 0.85 0.84 0.11 0.40 2007 0.76 0.75 0.15 0.46 2008 0.70 0.69 0.12 0.45 3 Year Average 0.77 0.76 0.12 0.44
(WOW (2006, 2007, 2008))
The table above shows short-term liquidity ratios that highlight Woolworths ability to repay its current liabilities. The company's current ratio was 0.7 at the end of 2008. This was below the S&P 500 companys average of 1.4. A lower than sector average current ratio indicates that the company is in a weaker financial position than other companies in the sector. This 19
does not indicate that Woolworths will struggle to meet their current liabilities more over it does show the leverage over their suppliers. The tight working capital management strategy has helped them sustain current growth rates. Woolworths does have positive operating cash flow so creditors may not see their short-term liquidity as a risk. Financial Leverage Long-term liquidity Ratio Liability to equity ratio Debt to equity ratio Interest coverage (earning basis) Interest coverage (cash flow basis) Sustainable growth rate 2006 2.54 1.16 6.90 2007 1.84 0.79 9.04 2008 1.56 0.54 13.22 3 Year Average 1.98 0.83 9.72
14.81
10.54
10.17
11.84
10.5%
10.8%
11.0%
10.8%
(WOW (2006, 2007, 2008))
The table above shows that Woolworths relies heavily on debt facilities to finance its net assets. Woolworths has seen a reduction on debt reliance from the period 2006 to 2008 with its liability to equity ratio and debt to equity ratio decreasing in 2006 and 2008. This implies that Woolworths is now using a conservative mix of both debt and equity to finance its capital programmes to sustain growth. The earnings based coverage ratio and cash flow based coverage ratio both measure Woolworths ability to meet all its fixed financial obligations such as interest expense. The earnings based coverage ratio indicates the EBIT available for each dollar of required interest payment. This ratio has improved significantly from 6.90 in 2006 to 13.22 in 2008. The cash flow based coverage indicates Woolworths ability to cover interest expense from its operating activities. This ratio has declined from 14.81 in 2006 to 10.17 in 2008. The sustainable growth rate is the rate that Woolworths can grow while keeping its profitability and expansion strategies unchanged. It is clear from the table above that Woolworths has a stable growth rate averaging around 10.8% over the period 2006 to 2008.
20
Appendix 7 Non Financial Ratios Sales per sqm Supermarkets (Australia) Supermarkets (New Zealand) General Merchandise 2006 15,341 8,928 5,082 2007 17,623 13,535 5,133 2008 20,256 14,062 5,503
(WOW (2006, 2007, 2008))
The Sales per square metre for Australian Supermarkets increased over the 3-year period from $15,341 in 2006 to $20,256 in 2008. This increase was also evident in NZ Supermarkets and Big W. A key factor was the efficient use of space and presentation (in store experience) in each of the stores. This indicates that Woolworths expansion of new stores and refurbishment programme helped increase year on year sales.
Gross Store Openings per annum Supermarkets (Australia) Supermarkets (NZ) Big W
2009
Target
Coles 2009
28 3 9
15-25 3-8 9-10
17 -
The number of new store openings in 2009 surpassed the targets set by Woolworths in 2008. This indicates that Woolworths aggressive growth by scale strategy initiatives is working and is exceeding targets set out by its growth by scale business strategies. It also shows that Woolworths is outpacing Coles in the race to grow market share through geographic expansion across the Australasian market.
Sales per employees Total employees Sales / Total employees
2006 175,000 217,018
2007 181,270 235,708
2008 190,000 249,064

(WOW (2006, 2007, 2008))
The above table shows the total sales generated for each employee at Woolworths. This indicates that labour productivity at Woolworths increased sales from $217,000 per employee in 2006 to $249,046 per employee in 2008.
21
Sales per Store Total Stores (Supermarkets) Total Stores (Gen Merchandise) Sales / Supermarket stores Sales / General Merchandise stores
2006 954 495 34,017,820
2007 965 542 37,846,632
2008 981 567 41,093,782
8,658,586
8,809,963
9,606,702
(WOW (2006, 2007, 2008))
The table above draws attention to the total number of supermarket and general merchandise stores in Australia which grew year on year from 2006 to 2008. In terms of sales supermarkets increased sales from $34 million in 2006 to $41 million in 2008. Similarly, the increases in general merchandise stores also produced higher sales from $8.7 million in 2006 to $9.6 million in 2008. This indicates that Woolworths has successfully profited from store expansion and its growth by scale strategy.
Appendix 8:
22
SWOT Analysis - Overview Woolworths is a diversified retailer with principal operations in Australia and New Zealand. The company has a strong market presence and offers a broad product range through its supermarkets, general merchandise, fuel and liquor, hotels and consumer electronic outlets. The company has successfully leveraged its economies of scale to dominate and gain a competitive edge over its rivals in Australia. The supermarkets division in Australia is a key element of this scale that has enabled it to record strong and consistent performance over the past few years. Furthermore, emerging markets, growing demand for organic products and increasing demand for private labels offer a good opportunity for Woolworths to increase its business. However, it is currently limited due to its geographic concentration and limited liquidity position. In addition, rising cost of labour, intense competition, government regulation, natural disasters and slowdown of the economy may adversely affect the company's business. Discretionary consumer spending will continue to be influenced by macro-economic factors, such as interest rates, petrol prices and confidence around employment. As a result, consumer confidence levels and therefore spending may slow Woolworths sales revenue and expansion growth plans that may impact overall ROE.
Strengths Large store network presence in Australia and New Zealand Efficient use of resources through improved supply chain capabilities and refurbished stores Broad selection of products
Weaknesses Geographic concentration Limited liquidity position Limited operating margin
Opportunities Growing demand for organic and private label products Increasing global presence Customer focused initiatives
Threats Intense competition Slowdown in Australian economy
Source: 2008 Annual Report, Company Website, Primary and Secondary Research and Datamonitors.
Strengths
23
Strong Presence in Australia and New Zealand Woolworths has a strong presence in Australia and New Zealand through its wide store network. It operates 2,759 stores including supermarkets, petrol sites and general merchandise stores as well as 271 hotels. Woolworths operates through diversified segments namely, supermarket group, general merchandise group, consumer electronics group, hotels group and wholesale group. Broad Product Portfolio Woolworths provides a wide selection of private branded products and solutions through its retail store chain. Its wide product portfolio insulates it from fall in demand for any particular product line thereby giving it a balanced revenue platform. The company serves its customers through multiple store formats including supermarkets, general merchandise stores, petrol outlets and hotels. Its product portfolio includes grocery, general merchandise, consumer electronics, liquor, beverages and fuel with offerings comprising brands such as Homebrand, Select, Naytura and Organics. Efficient use of Resources Woolworth has prided itself on its supply chain management and is recognised as a leader in this field. It is this factor that has helped the company's return on equity (ROE) to increase to 27.7% in 2008. This was above its main rival Coles (Wesfarmers) and the S&P 500 companys average of 12.9%. This higher ROE indicates that the company is efficiently using the shareholders' money and that it is generating high returns for its shareholders compared to other companies in the sector. Weaknesses Geographic Concentration The company's operations are concentrated in Australia. The companys warehouse and distribution centres are located in Australia and most of its store operations span across the regions of Australia. Almost 80% of Woolworths supermarkets are located in Australia with the remaining located in New Zealand. Due to the concentration of operations in Australia, Woolworths is more susceptible to regional factors, which include changes in the economy, weather conditions, demographics and population, as compared to the more geographically diversified competitors like ALDI Group and Coles Group limited. Limited Liquidity Position The company's current ratio was 0.7 at the end of fiscal year 2008. This was below the S&P 500 companys average of 1.410. A lower than sector average current ratio may indicate the company is in a weaker financial position than other companies in the sector.
Limited Operating Margin

10
Source : www.globalmarketsandcompanies.com and Yahoo Finance
24
The company's operating margin (EBIT) was 5.3% for 2008. This was below the S&P 500 companys average of 14.7%11. A lower than S&P 500 companys average operating margin may indicate inefficient cost management or a weak pricing strategy by the company. However, the company's operating margin has increased over 2007 indicating that the management has been focusing on profitability. Opportunities Growing Demand for Organic Products The company stands to benefit from the growing demand for organic products in Australia and this is evident by the companys acquisition of Macro Organic Food Products in 2009. Even though the organic foods take a small share in the retail market, growing acceptance is visible as customers begin to understand the benefits of these products. Woolworths has around 150 organic lines12, which includes its private label Woolworths Organics range. It can further increase its offering of organic products and private labels in this segment to increase its sales and profits. Increasing global presence The company has an opportunity to increase its global presence by expanding its operations into emerging markets and benefitting from increasing disposable incomes in these markets. The company already has a presence in India through a venture with TATA where Woolworths provides buying, wholesale and supply chain services with huge potential for future growth. Similarly, by organic growth or through acquisitions, the company can diversify geographically. Rising Demand for Private Labels The company stands to benefit from the increasing demand for private label products in Australia. Improvements in packaging and quality have helped to remove the stigma attached to buying store brands. As the company also offers private labels, it has a strong opportunity to increase its revenues and profits in the future. Customer Focused Initiatives In 2008/09 Woolworths launched a number of customer focused initiatives. This includes the financial services product through The Everyday Money credit card. The company also entered a loyalty alliance in June 2009, which will allow customers to earn Qantas Frequent Flyer points as part of their everyday shopping. This program will provide further value to loyal customers across its brands and help driving future growth within its core business.
Threats Intense Competition

11 12
Source : www.globalmarketsandcompanies.com and Yahoo Finance 2008 Woolworths Annual Report
25
Woolworths faces intense competition from various retailers. Competition in the sector also forces Woolworths to spend more on advertising and promotions, which increases its operating costs. The major competitive factors that affect the business include store location, product availability, customer service and product offerings, credit availability, quality and price. Woolworths faces competition from both national and regional retail chains of stores, discount stores and mass merchandisers, including Aldi Group, Coles, Metcash and other retailers. Other retailers are more diversified geographically, and have a competitive edge over Woolworths as they can leverage on the same for sourcing its supplies and can compensate the losses from one region to another. Slowdown in the Australian Economy Although Australia has handled the economic financial crisis better than most other countries, macro-economic factors still pose a major threat to the company. A slowdown in the Australian economy may adversely affect the companys business as consumers are left with lower disposable incomes.
26
Appendix 9 Woolworths Limited Profit and Loss Forecast 2009-2014

Woolworths Limited (WOW) Forecast Financial Statements Type 1 Forecasting Model
2008 Revenues Food & Liquor Petrol Big W Consumer Electronics Hotels Wholesale Other Sales Revenue Total Sales Revenue YonY total Revenue Growth Other Income Total Revenue Total YonY Growth Expenses Cost of Goods Sold Branch Expenses Administration Expenses Prelim Financials 2009 2010 2011 2012 2013 2014
34,670.7 5,642.1 3,915.9 1,530.6 1,113.4 162.1 287.3 47,322 47,322
36,490.4 5,938.2 4,267.3 1,723.8 1,110.3 167.8 148.4 49,846 5% 49,846 5%
39,409.6 6,413.3 4,651.4 1,941.0 1,165.8 169.5 155.8 53,906 8% 53,906 8%
42,562.4 6,926.3 5,070.0 2,185.6 1,224.1 171.2 163.6 58,303 8% 58,303 8%
45,967.4 7,480.5 5,526.3 2,460.9 1,285.3 172.9 171.8 63,065 8% 63,065 8%
49,644.8 8,078.9 6,023.6 2,771.0 1,349.6 174.6 180.4 68,223 8% 68,223 8%
53,616.3 8,725.2 6,565.8 3,120.2 1,417.1 176.4 189.4 73,810 8% 73,810 8%
35,257.8 7,330.5 2,205.0 44,793 94.7% 2,529 5% (24.7) -
36,974.4 7,800.4 2,255.9 47,031 94.4% 2,816 6% (24.3) -
39,944.7 8,193.8 2,479.7 50,618 93.9% 3,288 6% (24.3) -
43,202.7 8,862.1 2,681.9 54,747 93.9% 3,556 6% (24.3) -
46,731.2 9,585.9 2,901.0 59,218 93.9% 3,847 6% (24.3) -
50,553.2 10,369.9 3,138.3 64,061 93.9% 4,162 6% (24.3) -
54,693.5 11,219.2 3,395.3 69,308 93.9% 4,502 6% (24.3) -
E/R Ratio (expenes/revenue) Net Operating Profit From Ordinary Activities Return on Sales Inter-Company investment Profits Abnormal Items
Net Operating Profit Before Tax (NPBT) Tax on Operating Profit Net Operating Profit After Tax (NOPAT) Interest Expense Net Expense Tax Shelter Interest Expense After Tax Net Profit After Tax (NPAT) Extraordinary Non-operating Items Net Profit after Tax and Extraordinary Items
2,504 743.4 1,761 3.7% 191.3 (57.4) 133.9 1,627 (131) 1,496
2,791 766.4 2,025 4.1% 118.1 71.0 189.1 1,836 (120) 1,716
3,264 979.2 2,285 4.2% 177.9 177.9 2,107 (106) 2,001
3,532 1,059.7 2,473 4.2% 177.1 177.1 2,295 (106) 2,189
3,823 1,146.8 2,676 4.2% 175.7 175.7 2,500 (106) 2,394
4,137 1,241.2 2,896 4.2% 173.5 173.5 2,723 (106) 2,617
4,478 1,343.4 3,135 4.2% 170.5 170.5 2,964 (106) 2,858
27
Appendix 9 Woolworths Limited Balance Sheet Forecast 2009-2014

Woolworths Limited (WOW) Forecast Financial Statements Type 1 Forecasting Model
2008 Operating Assets and Liabilities Current Assets Cash and cash equivalents Trade and other receivables Inventories Prepayments Other assts Total Current Assets Current Liabilities Trade and other payables Current tax liabilities Provisions Other Total Current Liaibilities Net Current Assets Non Current Assets Property Plant & Equipment Trade and other receivables Inventories Investments - Equity Investments - Other Intangibles Deferred tax assets (Future Income Tax Benefit) Defined benefit assets 5,639 3.6 262.0 4,835.2 430.7 5,532 11,170 5,383 5,822 6,297 6,811 7,368 7,972 Prelim Financials 2009 2010 2011 2012 2013 2014
754.6 455.2 3,010.0 182.6 34.7 4,437
4,486
4,852
5,247
5,676
6,140
6,643
4,737.7 330.2 677.2 67.2 5,812 (1,375)
5,483 (997)
5,930 (1,078)
6,413 (1,166)
6,937 (1,261)
7,505 (1,364)
8,119 (1,476)
5,583 10,966
6,038 11,859
6,530 12,827
7,063 13,874
7,641 15,009
8,267 16,238
Total Non Current Assets Non Current Liabilities Trade and other payables Deferred tax liabilities 2 Provisions - Employee and Other Other Total Non-Current Assets Net Operating Assets (NOA) Financing Activities Borrowings - Current Borrowings - Non Current Derivative financial assets - Current Derivative financial liabilities - Current Derivative financial assets - Non Current Derivative financial liabilities - Non Current Net Financial Obligations Equity Share capital New Share Capital Reserves Retained Profit Current Profit Dividend Minority Interests Total Shareholders Funds Opening CSE Clean Surplus Profit Dividends Change in MI Closing CSE
380.0 134.1 514.1 9,281
523.4 9,446
566.0 10,215
612.2 11,048
662.2 11,951
716.3 12,928
775.0 13,987
550.2 2,224.0 (65.1) 61.9 274.7 3,046 2,541 2,530 2,510 2,478 2,435 2,379
3,567.1 (133.9) 2,559.7
3,567.1 (133.9) 2,559.7 1,715.8 (1,046.6) 242.4 6,904 6,235.3 1,715.8 1,046.6
3,567.1 (133.9) 3,228.9 2,000.9 (1,220.5) 242.4 7,685 6,904.5 2,000.9 1,220.5
3,567.1 (133.9) 4,009.2 2,189.4 (1,335.5) 242.4 8,539 7,684.8 2,189.4 1,335.5
3,567.1 (133.9) 4,863.1 2,394.2 (1,460.5) 242.4 9,472 8,538.7 2,394.2 1,460.5
3,567.1 (133.9) 5,796.8 2,616.6 (1,596.1) 242.4 10,493 9,472.4 2,616.6 1,596.1
3,567.1 (133.9) 6,817.3 2,858.2 (1,743.5) 242.4 11,608 10,492.9 2,858.2 1,743.5
242.4 6,235 5,526.5 1,496.2 790.4 3.0 6,235
6,904
7,685
8,539
9,472
10,493
11,608
28
Appendix 10 Woolworths Limited Revenue Forecast 2009-2014

60,000 50,000 40,000 30,000 20,000 10,000 200 200 201 201 201 201 201 8 9 0 1 2 3 4 Food & Liquor 34,671 36,490 39,410 42,562 45,967 49,645 53,616 Petrol 5,642 5,938 6,413 6,926 7,480 8,079 8,725 Big W 3,916 4,267 4,651 5,070 5,526 6,024 6,566 Consumer Electronics 1,531 1,724 1,941 2,186 2,461 2,771 3,120 Hotels 1,113 1,110 1,166 1,224 1,285 1,350 1,417 Wholesale 162 168 169 171 173 175 176 Other Sales Revenue 287 148 156 164 172 180 189 -
Revenue $m's
Woolworths Limited Profit Forecast - 2009 to 2014

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0
$millions
20 08
20 09
20 10
20 11
20 12
20 13
20 14
Net Operating Profit From 2528.8 2815.5 3288.29 3556.49 3846.97 4161.6 4502.43 Ordinary Activities Net Operating Profit After Tax 1760.71 2024.84 2284.79 2472.53 2675.87 2896.11 3134.69 (NOPAT) Net Profit after Tax and 1496.2 1715.74 2000.89 2189.4 2394.18 2616.62 2858.21 Extraordinary Items
29
Appendix 11 WACC Calculation
Woolworths Averaged Weighted Cost of Capital
Bank Loans Loans Domestic Notes Fixed Rate Dom Notes Fixed Rate Dom Notes Usd Notes Usd Notes Woolworths Notes Debt Long Term
2 3 4 5 365 366 366 366 Floating 30/06/2010 30/06/2011 30/06/2012 1/07/2013 2/07/2014 249.6 150 299.9 199.2 313.5 965.5 595
Non interest
Total
Effective After Tax Rate Rate 30% 3.94% 0.02% 2.37% 4.73% 3.14% 4.94% 15.23% 9.38% 43.75% 56.25% 9.35 9.35 5.26 7.21 8.75 0 5.7 5.85 5.85 5.84 5.84 7.12 6.125 0 3.99 4.095 4.095 4.088 4.088 4.984 0.241 0 0.094 0.194 0.129 0.202 0.622 0.468
1.5
249.6 1.5 150 299.9 199.2 313.5 965.5 595 2774.2
Equity
3567.1
3567.1 6341.3
Govt Rate
5.09
Beta Risk Premium 0.71 6
9.35
30
Appendix 12: Residual Income Equity Method
Woolworths Limited (WOW) Valuations

2008 2009 2010 2011 2012 2013 2014
Residual Income/Abnormal Earnings Model (Equity valuation) Net Profit Shareholders Funds Residual Income Forecast Valuation Cost of Capital Terminal Growth Rate Book Value Residual Income Forecast Terminal 9.35% 3.25% 6,235.30 5,938.91 19,886.74 1,626.80 6,235.30 1,835.78 6,904.45 2,106.90 7,684.80 2,295.41 8,538.67 2,500.18 9,472.40 2,722.62 10,492.88
1,252.78
1,461.33
1,576.88
1,701.82
1,836.95
1,896.65
Market Value Shares Share Price
32,060.95 1,210.52 26.49

2008 2009 2010 2011 2012 2013 2014
1,252.78
1,461.33
1,576.88
1,701.82
1,836.95
1,873.69
28,479.04 1,210.52 23.53
31

2008 2009 2010 2011 2012 2013 2014
1,252.78
1,461.33
1,576.88
1,701.82
1,836.95
1,836.95
24,740.06 1,210.52 20.44
32
Appendix 13: Residual Income Firm Method

2008 2009 2010 2011 2012 2013 2014
Residual Operating Income Model (Firm valuation) NOPAT NOA Residual Operating Income Forecast Valuation Cost of Capital (firm) Terminal Growth Rate NOA Residual Operating Income Forecast Terminal 7.21% 2.70% 9,281.00 6,927.51 32,708.87 1,760.71 9,281.00 2,024.88 9,445.87 2,284.79 10,215.27 2,472.54 11,048.46 2,675.87 11,950.84 2,896.11 12,928.25
1,355.72
1,603.75
1,736.02
1,879.28
2,034.46
2,089.39
Firm value Book value of debt Equity value
48,917.38 3,045.70 45,871.68
Shares Share Price
1,210.52 37.89

2008 2009 2010 2011 2012 2013 2014
1,355.72
1,603.75
1,736.02
1,879.28
2,034.46
2,060.90
40,828.82 3,045.70 37,783.12
Shares Share Price
1,210.52 31.21
33

2008 2009 2010 2011 2012 2013 2014
1,355.72
1,603.75
1,736.02
1,879.28
2,034.46
2,034.46
36,130.67 3,045.70 33,084.97
Shares Share Price
1,210.52 27.33
34
Appendix 14: Discounted Cash Flow Model Equity

2007 2008 2009 2010 2011 2012 2013 2014
Discounted Cash Flow Model (Equity valuation) Net Profit NOA change NOA Change Debt Free cash flow FCF (Equity) 1,626.80 9,281.00 434.90 1,835.78 9,445.87 164.87 504.29 2,106.90 10,215.27 769.41 10.94 2,295.41 11,048.46 833.19 20.68 2,500.18 11,950.84 902.38 31.36 2,722.62 12,928.25 977.41 43.07
8,846.10
1,166.62
1,326.55
1,441.54
1,566.45
1,702.14
1,753.20
Valuation Cost of Capital (equity) Terminal Growth Rate FCF Forecast Terminal 9.350% 3.000% 5,463.00 17,658.93
Equity value
23,121.93
Shares Share Price
1,210.52 19.10

2007 2008 2009 2010 2011 2012 2013 2014
8,846.10
1,166.62
1,326.55
1,441.54
1,566.45
1,702.14
1,727.67
Equity value
19,539.58
Shares Share Price
1,210.52 16.14
35

2007 2008 2009 2010 2011 2012 2013 2014
8,846.10
1,166.62
1,326.55
1,441.54
1,566.45
1,702.14
1,702.14
Equity value
17,106.65
Shares Share Price
1,210.52 14.13
36
Appendix 15: Discounted Cash Flow Model - Firm

2007 2008 2009 2010 2011 2012 2013 2014
Discounted Cash Flow Model (Firm valuation with perpetuity based terminal value) NOPAT NOA change NOA fcf: 1,760.71 9,281.00 434.90 1,325.81 2,024.88 9,445.87 164.87 1,860.01 2,284.79 10,215.27 769.41 1,515.39 2,472.54 11,048.46 833.19 1,639.35 2,675.87 11,950.84 902.38 1,773.49 2,896.11 12,928.25 977.41 1,918.70
8,846.10
Free cash flow Forecast Valuation Cost of Capital (firm) Terminal Growth Rate FCF Forecast Terminal 7.210% 3.250% 7,080.77 35,320.34
1,860.01
1,515.39
1,639.35
1,773.49
1,918.70
1,981.05
42,401.11 3,045.70 39,355.41
Shares Share Price
1,210.52 32.51

2007 2008 2009 2010 2011 2012 2013 2014
8,846.10
1,860.01
1,515.39
1,639.35
1,773.49
1,918.70
1,952.27
32,325.56 3,045.70 29,279.86
Shares Share Price
1,210.52 24.19
37

2007 2008 2009 2010 2011 2012 2013 2014
8,846.10
1,860.01
1,515.39
1,639.35
1,773.49
1,918.70
1,918.70
25,869.38 3,045.70 22,823.68
Shares Share Price
1,210.52 18.85
38
Appendix 16: Sensitivity Analysis (Assumptions 1% increase in COGS )

2008 2009 2010 2011 2012 2013 2014
1,252.78
1,083.98
1,172.21
1,267.66
1,370.93
1,398.35
23,115.83 1,210.52 19.10 23.53 4.43 -18.83% Previous price Change % change
Assumptions 1% increase in COGS

2008 2009 2010 2011 2012 2013 2014
1,355.72
1,226.40
1,327.89
1,437.82
1,556.89
1,588.03
36,397.83 3,045.70 33,352.13
Shares Share Price
1,210.52 27.55 31.21 3.66 -11.72% Previous price Change % change
39
Appendix 16: Sensitivity Analysis (Assumptions 1% increase in COGS )

2007 2008 2009 2010 2011 2012 2013 2014
Discounted Cash Flow Model (Equity valuation) Net Profit NOA change NOA Change Debt Free cash flow FCF (Equity) 1,626.80 9,281.00 434.90 1,835.78 1,729.55 1,876.98 2,037.00 2,210.69 9,445.87 10,215.27 11,048.46 11,950.84 12,928.25 164.87 769.41 833.19 902.38 977.41 504.29 136.22 142.51 149.28 156.58
8,846.10
1,166.62
1,096.37
1,186.30
1,283.91
1,389.86
1,431.56
Equity value
19,097.14
Shares Share Price

2007 2008 2009 2010 2011 2012 2013 2014
8,846.10
1,860.01
1,138.04
1,231.22
1,332.04
1,441.14
1,487.97
32,279.11 3,045.70 29,233.41
Shares Share Price
40
Appendix 17: Sensitivity Analysis (Assumptions 1% decrease in revenue)

2008 2009 2010 2011 2012 2013 2014
1,252.78
1,440.04
1,537.86
1,642.62
1,754.83
1,789.93
27,608.57 1,210.52 22.81 23.53 0.72 -3.06% Previous price Change % change
Assumptions 1% decrease in all Revenue Streams

2008 2009 2010 2011 2012 2013 2014
1,355.72
1,582.46
1,697.00
1,819.94
1,951.90
1,990.94
43,035.26 3,045.70 39,989.56
Shares Share Price
1,210.52 33.04 31.21 Previous price 1.83 Change 5.85% % change
41
Appendix 17: Sensitivity Analysis (Assumptions 1% decrease in revenue)

2007 2008 2009 2010 2011 2012 2013 2014
8,846.10
1,166.62
1,313.56
1,417.26
1,528.98
1,649.32
1,698.80
Equity value
22,484.55
Shares Share Price

2007 2008 2009 2010 2011 2012 2013 2014
8,846.10
1,860.01
1,588.57
1,702.42
1,824.53
1,955.51
2,019.07
43,258.30 3,045.70 40,212.60
Shares Share Price
1,210.52 33.22 32.51 Previous price 0.71 Change 2.18% % change
42

Woolworths PAST JOB

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UNIVERSITY OF TECHNOLOGY SYDNEY Graduate School of Business

22743 BUSINESS VALUATION AND FINANCIAL ANALYSIS

PROFESSOR ZOLTAN MATOLSCY Case Study: Woolworths

10388039 02130033 03005802 10669428

ASSIGNMENT DUE 21 October 2009

Woolworths Limited: Case Study

FinAnalysis, http://www.aspectfinancial.com.au.ezproxy.lib.uts.edu.au/af/company/mainview?ASXCode=WOW, viewed on 2 October 2009

2. Business Strategy Analysis

12.19% 27.7% 5.36%

Woolworths Limited (WOW) Reformatted Financial Statements

23,569.6 3,308.4 2,908.7 1,007.5 415.8 142.5 31,589.1 0.0 31,589.1

28,063.0 4,390.4 3,119.1 1,167.1 849.9 144.7 37,978.2 0.0 37,978.2

31,685.0 4,836.8 3,465.2 1,310.2 1,032.1 147.8 42,726.8 0.0 42,726.8

34,670.7 5,642.1 3,915.9 1,530.6 1,113.4 162.1 47,322.1 0.0 47,322.1

23,678.9 5,029.9 1,578.2 30,287.0

28,388.7 6,099.0 1,768.3 36,256.0

31,832.8 6,781.2 2,001.5 40,615.5

35,257.8 7,330.5 2,205.0 44,793.3

Net Operating Profit From Ordinary Activities

Inter-Company investment Profits Abnormal Items

1,301.1 379.8 921.3

1,710.1 520.7 1,189.4

2,094.0 636.5 1,457.5

2,504.1 743.4 1,760.7

150.1 -45.0 105.1

249.7 -74.9 174.8

233.6 -70.1 163.5

191.3 -57.4 133.9

816.2 0.0 816.2

1,014.6 -329.8 684.8

1,294.0 263.8 1,557.8

1,626.8 -130.6 1,496.2

(WOW (2006, 2007, 2009))

433.8 487.2 1,969.6 108.4 65.4

525.9 1,048.2 2,316.1 112.2 115.6

798.8 379.7 2,739.2 105.0 96.9

754.6 455.2 3,010.0 182.6 34.7

2,857.0 105.5 523.5 59.1 -480.7

3,511.5 84.6 604.0 61.9 -144.0

4,184.7 212.9 650.5 0.0 -928.5

4,737.7 330.2 677.2 67.2 -1,375.2

16.2 1.1 3,359.3 2,046.4 287.7

14.0 59.5 4,055.8 4,759.4 336.9

5.4 256.0 4,623.0 5,003.5 367.2

3.6 262.0 5,638.8 4,835.2 430.7

290.0 93.9 4,846.1

340.7 99.1 8,641.8

382.3 98.2 8,846.1

380.0 134.1 9,281.0

235.5 2,610.4 0.0 0.0 0.0 2,845.9

612.3 3,704.0 -2.8 0.0 70.7 4,384.2

379.8 2,690.9 -41.4 74.9 227.2 3,331.4

550.2 2,224.0 -65.1 61.9 274.7 3,045.7

Equity Share capital Reserves Retained Profit Minority Interests

878.8 31.6 1,063.8 26.0 2,000.2

2,860.7 -288.6 1,455.7 229.8 4,257.6

3,351.1 -26.5 1,962.5 239.4 5,526.5

3,567.1 -133.9 2,559.7 242.4 6,235.3

(WOW (2006, 2007, 2009))

15-25 3-8 9-10

Sales per employees Total employees Sales / Total employees

2006 175,000 217,018

2007 181,270 235,708