Woolworths takes $959m charge, axes 500 jobs, slows store rollout

Woolworths shares surged following the flagging of job cuts, as investors eyed an uptick in supermarket operations.

Woolworths CEO Brad Banducci. Woolies will axe 500 jobs and slow its supermarket rollout. Pic: Brett Costello

Woolworths has enjoyed its best day on the market since 1997, seeing its value rise by more than $2 billion despite announcing it would take a $959 million impairment charge in its upcoming full-year accounts.

Investors were in a euphoric mood largely due to consequent talk of improvement at the group’s flagship supermarket operations, while also welcoming more details on a turnaround plan that has seen recently hired chief executive Brad Banducci clear the decks at the struggling retailer.

An 8 per cent rise in today’s session has its shares at a six-month high, up 19 per cent since striking a near 10-year low of $20.30 on July 6, as UBS analysts warned of the growing risk of a full-blown price war in the grocery sector.

The supermarket giant (WOW) today told investors the near $1bn in charges related to restructuring costs tied to a five-year turnaround plan, with the moves to trim after-tax profit by $766m for FY2016.

It brings the group’s pre-tax impairment charges to over $4 billion for the full-year after it accepted a $3.25bn writedown in the first-half relating to its troubled — and soon to be divested — hardware business.

The retailer last week received interest from a “number of parties” in both its Masters and Home Timber and Hardware operations as an auction process nears an end.

The February move to detail impairments was quickly followed by a ratings downgrade from Moody’s, with Woolworths today reiterating its commitment to, and confidence in, retaining a solid investment grade rating without being forced to tap investors for cash.

S & P also downgraded the retailer’s rating this year, although it waited until after the group’s third quarter sales update in May.

Woolworths’ restructure will see the loss of 500 jobs from its support office and supply chain, while a further 1000 will be shifted from the group office into its businesses.

More jobs are in line to be made redundant as the group continues a review of all back office roles.

In total the shift to a new operational model — which includes the costs of redundancies — will come to $155m, while a further $344m is tied to a decision to slow the rollout of supermarkets and close underperforming or unprofitable stores.

Woolworths said 17 Australian supermarkets were slated for closure prior to the end of their lease, on top of just one such move made in fiscal 2016.

A further 15 local supermarkets face closure at the end of their lease terms if their underperformance is not rectified.

Over the next three years the group expects to open around 45 new outlets, half its previous outlook.

In a conference call with analysts following the announcement, Mr Banducci said the group had shifted its focus to renewal stores, which are “exceeding expectations”.

“We are still focused on growing our network but in a more balanced manner,” he said.

He added the group had seen performance improve in June that had continued through July.

The remaining $460m charge is linked to its embattled general merchandise business, which is dominated by discount chain Big W. Of this amount $309m is due to a total write-off of its purchase of New Zealand direct retailer EziBuy.

The acquisition was made just three years ago and Woolworths has now put the business on the auction block in the hope of reaping some return from its investment.

Mr Banducci said the outcomes were the conclusion of five months of change since his appointment in February.

“Five months ago I said we would work hard to get customers to put us first, to improve our culture and rebuild momentum,” he said.

“While we have had to make some tough decisions and this has ramifications for many of our team, we are confident we are putting in place solid foundations for the future and early results give us confidence we are on the right track.”

Woolworths is now expecting pre-tax earnings of between $2.55 billion and $2.57bn. This compares unfavourably to last year’s $3.32bn number.

Mr Banducci said the green shoots in its supermarket results through June and July were due to “clear signs of progress” both in how customers perceive the group and on staff engagement.

“This will be a three to five year journey and we are determined to drive sustainable improvements in sales per square metre and return on funds employed to deliver value for shareholders,” he said.

“We are making good progress in rebuilding our business and this is the next step in the process.”

At the closing bell, Woolworths shares traded up 7.8 per cent at $24.19, against a broader market rise of 0.6 per cent.