Woolies boss Brad Banducci has miles to go before aisles fill up

The Woolies repair job remains a three to five-year exercise, but at least Brad Banducci is acting with some urgency.

Leaf Resources

Woolworths (WOW) $24.30

The most heartening aspect of Woolies’ multi-pronged get-fit strategy is that shoppers are returning to its revamped stores and — get this — buying more stuff.

“We have put the past behind us,’’ declares CEO Brad Banducci. “There are early signs our strategy is working.’’

Given the recent past — it has been beaten by Coles on quarterly sales for 27 consecutive occasions — the nascent turnaround is more overdue than Godot.

Banducci confirms the “improved customer shopping experience’’ has translated into like-for-like volume growth and, yes, this also means increased per-shopper basket size (a weak point for the retailer). Heartened by the performance of seven new-look stores, management has resolved to temper the extent of its planned store rollouts in favour of spending money on existing outlets.

Of the 1000 stores, 17 will close while on a net basis 45 will open, but that’s a haircut on the envisaged 90 to 100 stores.

From now on, the upper echelons at Bella Vista HQ in Sydney will be measured on return on funds employed and sales per square metre.

“We are still focused on growing our network, but in a more focused manner,’’ Banducci says.

While Woolies shares relief-rallied 8 per cent yesterday, the repair job remains a three to five- year exercise. In the meantime, the Wesfarmers-owned Coles won’t be sitting idly on their oversized red hands. But at least Woolies management is acting with a sense of urgency.

We await the retailer’s August 25 full-year results, which include the fourth-quarter sales numbers, with trembling anticipation.

Long-term buy.

Australian Foundation Investment Company (AFI) $5.85

Is that grinding noise the sound of the world slowing on its axis?

In AFIC’s first strategy shift since about 1947, our biggest listed investment company has lightened up on two of its beloved bank holdings, dispensing with $82m of Westpac scrip and $40m of Commonwealth Bank shares during the year.

Most AFIC investors hold the stock for the franked dividends, which in turn means an over-the-odds exposure to the Four Pillars (and Telstra).

AFIC has also decided the ­supermarkets’ margins will be chipped away by nimbler newcomers and has similarly applied a haircut to its sizeable Wesfarmers and Woolworths holdings.

The new world order has seen the top 20 blue chips (which account for 60 per cent of the market’s value) fall 7 per cent during the year, or 10 per cent if divs aren’t taken into account.

The small to mid-cap segment rose 15 per cent. “It’s an unusual market from our perspective,’’ says AFIC’s Geoff Driver.

In keeping with the migration, AFIC has been topping up on smaller stocks normally outside its comfort zone: Qube Holdings and Freedom Foods to name a few.

“Many of the larger companies are facing competitive headwinds in a lower growth environment that may persist for some time,’’ AFIC warns.

AFIC maintained its final div at 14c, which is creditable given the big-end’s battering. The trouble is, the middling stocks aren’t so great for franked yield, so AFIC’s payouts may well be curtailed in the quest for capital growth.

The banks still account for 24 per cent of AFIC’s $6.5bn portfolio, compared with 29 per cent a year ago. Hold.

Leaf Resources (LER) 13c

The renewables play has won US backing that is bigger than Texas: a JV with Dallas-based renewables giant Claeris to develop Leaf’s homegrown process that converts biomass into cellulosic sugars.

These sugars can be used to make bioplastics and biofuels more economically than conventional methods such as corn starch conversion. “There is now a validation of this great Australian technology by a US outfit that knows the space,’’ says Leaf chief Ken Richards.

Claeris, which approached Leaf rather than the other way round, has shown its commitment with a $US500,000 investment in Leaf shares.

“We have reviewed many emerging technologies in the renewable chemical sector, but we have not seen anything quite as revolutionary and potentially profitable as Leaf’s Glycell process,’’ says Claeris managing partner Michael Slaney.

That’s lofty praise, given Claeris built and sold the world’s biggest ethanol project, ASAlliances Biofuels, for $US725m. It also floated Colorado biofuels outfit Gevo on the Nasdaq for an initial $US400m market capitalisation.

The venture plans to develop five projects close to the biomass source, such as hardwood in the southeast of the US or palm oil tree waste in Malaysia. A key target market is bioplastics, given names such as Coca Cola, Nestle and Unilever are committed to replacing petrochemical-derived plastics. Spec buy.

The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author owns Wesfarmers and Woolworths shares.