Big moves and bad plays bring grocery downgrade
Analysts have unleashed savage downgrades on their views of Woolworths’ stock, following the departure of chief executive Grant O'Brien and the sacking of 1,200 workers.
Broking houses including Morgan Stanley, UBS, and Deutsche Bank say falling sales and concerns about a slow and expensive turnaround have forced them to slash their target prices.
Morgan Stanley analyst Thomas Kierath cut his already rough price target of $24 a share down to $21.
UBS slashed its 12-month target price from $26.90 to $24, factoring a 5 per cent slump in net profit.
Deutsche Bank cut its target price from $28 to $26.80, saying stalled top line sales do not look like turning around anytime soon.
UBS says the all important like-for-like sales fall by 3.5 per cent in the 2016 financial year.
UBS lead analyst Ben Gilbert has told reporters that Woolworths is a good business, but has been too short-term focused.
“We believe it will take at least 24 months to return to a defendable like-for-like sales growth trajectory and along the way there is a very real risk of a major earnings and margin rebase [cut],” Mr Gilbert said.
Morgan Stanley sees three options for Woolworths; immediately closing stores, changing its format radically, or a total or partial sell-off.
“The potential liability runs into the billions and we think that, for investors to have comfort investing in Woolworths, a solution to the Masters problem needs to be found,” the analysts warned.
UBS is forecasting a near $200 million loss for Masters next year.
The analysts note that Mr O'Brien had been a central figure in the bold yet expensive Masters expansion, but his departure means exiting the business is at least “plausible”.
Morgan Stanley says the Woolworths board should look for an external CEO appointment to replace Mr O’Brien, suggesting someone with experience in global supermarkets in dealing with discounters, as Aldi and Costco gain more and more ground.
Some have also expressed concern about a perceived lack of leadership, following the exodus of talent.