Woolworths Limited - Essay Example

Woolworths Limited Name Course Lecturer Date Woolworths Limited An Evaluation of the Company's Recent History and Financial Performance This company was established in 1924 by the owner Max Sonneberg; it opened its first Woolworths stupendous bargain basement in Sydney’s imperial arcade on Friday 5th. December 1924. He believed that success is founded on providing customers with superior quality products at reasonable prices; this has been instrumental to the company's growth. The company is a retailer primarily dealing in chain of supermarkets all over Australia(Woolworths Limited 2014). The company has other operations such as discount departmental stores, petrol through its Woolworths/Caltex alliance, hotels and home improvements. The company was re-listed in year 993 in the Australian stock exchange, from then it has been the most successful retailer in the history of Australian retail market. The company is also the most consistent retailer in the market. The company adopted acquisition as a strategy in a bid to increase its market presence, it acquired the ‘everyday low prices’ and ‘fresh food people’ strategies. It combined them with another strategy of ’everyday low costs’ to achieve above average growth in earnings (Arli et al., 2013). In 2000, the company launched a project refresh, this was meant to address its internal operations with focus on reorganization, end to end supermarket chains improvements and line items. The company was able to save 10 percent of its costs in 10 years’ time after launching the project refresh with the company being able to achievecumulative cost savings of more than $8 billion. This achievement has been mostly achieved by focus on cost of doing business to sales ratio which is around 20%. The company believes that it will be able to achieve more cost as it focus to switch to non-food sector as well as rationalizing the regional and national distribution centres. Recently, the company has launched a quantum project; this project focuses on the all aspects of the company businesses with benefits in cost of doing business and gross margin to emerge through 2015 (King2014). This move relates more to home improvement segments o9f the company as well as withdrawal from consumer electronics. This is an overall change in the company's overall direction although its chain of supermarkets will still remain the dominant driver of the company earnings. The company reports a net profit after tax of $1.15 billion; this represents profit growth of 19.4%. It’s revenue from ordinary activities increased by 4.8% to $30.23 billion. The company had an operating cash flow of $2.2 billion; this was an improvement from $1.67 billion from the previous trading period. Looking ahead, the company expects the net profit after tax to continue increasing; it expects it to increase in the range of 4% to 6% on the next financial period(King 2014). A peer company to Woolworths limited is the Coles group limited. This group is also a retailer in the Australian market (Coles Myer Limited, 2014). Whilst Woolworths Limited is the largest retailer in the Australian market, Cole’s group limited is the second largest retailer. As such, these two companies are their biggest rivals as well as their close competitors. The financial statements of both companies indicate that Woolworths had a better performance than Cole’s group although their profitability was very close. Coles had a net profit after tax of one billion in the sale period as Woolworths. This indicates a close competition in acquiring and retaining customers (Keith2012). Return on equity of Woolworths Limited using the DuPont approach ROE = net profit margin * asset turnover * equity multiplier ROE = (net income / sales) * (sales / assets) * (assets / equity) ROE = (2124.0/52745.7)* (52745.7/20828.4)* (20828.4/7845.8) ROE = 0.0403* 2.5324* 2.6547 ROE = 0.27 Peer analysis - Coles group limited ROE = net profit margin * asset turnover * equity multiplier ROE = net profit margin * asset turnover * equity multiplier ROE =(net income / sales) * (sales / assets) * (assets / equity) ROE =(129877/3144904)* (3144904/1939705)* (1939705/520216) ROE = 0.0413* 1.621* 3.729 ROE = 0.25 The return on equity indicates that the company is performing better than its closest competitor Cole’s group. Although the difference is very small, it indicates the competitiveness of the two companies in the market. Essentially, Woolworths indicates a superior performance than its peer. This indicates that the company has good returns to its shareholders than its peer. The current issues facing the company, the industry it operates in and their impacts on the company earnings There are some issues facing Woolworths limited. The supermarket retailer could be facing a number of headwinds in future. The company together with Coles dominates the grocery sales in Australia but both companies face increasing competition from pure online services as well as packaged goods by suppliers as A. T. Kearney, a management accountant, states. Unless the company dominates its dominance over online grocery sales, the company could risk losing good share of its market and revenue to smaller niche competitors and other online retailers(King 2014). Another issue facing the company is peripheral businesses, masters and Big W. these are dragging the company's overall performance downward. The company's liquor and food remain in strong position but he company needs to formulate new strategies to address these challenge brought by these new businesses. Although the company indicates that the company earnings will continue to record growth in earnings, the company is facing competition and potential loss of market share as indicated above. The loss of market share would mean loss of revenue and this would hurt the company's growth. As such, it is very important for the company to search for new markets for its products in order to maintain its market dominance as well as protect its market(Woolworths Limited 2014). Another issue facing the company is sustainability challenge. Most of the company packaging are in polythene papers. This poses a challenge to the environment. The company has come under pressure from the environment regulatory authorities to take measures to address the challenge. As such, the company should look for alternative packaging including wrapping goods for their customers when they purchase goods. This would also mean increase in operational costs as the alternative packaging is more expensive than the polythene papers(Woolworths Limited 2014). The costs of regulation are also a major issue facing the company. Where there is existence of various regulatory regimes such at commonwealth level and in the states and territorial levels, the cost of compliance increase as the company has to comply with all of them. This is in respect to substantially the same activities, expertise and significant advice needed to interpret as well as apply the regulations to the activities of the national operator. While the company recognises that regulatory and compliance costs are necessary costs of doing business, the costs present increased costs that are more than an average business would incur (Gibson, Michayluk& Van de Venter2013). Importantly, the company has business activities, outlets and stores all over Australia. As such, it has to comply with the state, territorial and commonwealth regulations. These regulations are different and each entity maintains that the company has to comply. The company has to hire more employees to ensure regulation. Moreover, the company has to seek professional and legal advice concerning the regulations and laws. All these aspects increase costs to the company. Although compliance is good it does generate income to the company. On the other side, non-compliance is expensive as the company would incur penalties and fine on top of being required to comply(Woolworths Limited 2014). References Arli, V, Dylke, S, Burgess, R, Campus, R, & Soldo, E, (2013). Woolworths Australia and Walmart Us: Best Practices in Supply Chain Collaboration; Journal of Economics, Business, and Accountancy| Ventura, 16(1). Coles Myer Limited (2014, October 3). Share price performance . Retrieved October 3, 2014, from Coles Myer Limited: http://investor.myer.com.au/Investor-Centre/ Gibson, R, Michayluk, D, & Van de Venter, G, (2013). Financial risk tolerance: An analysis of unexplored factors: Financial Services Review, 22(1). Keith, S, (2012). Coles, Woolworths and the local, Locale: The Australasian-Pacific Journal of Regional Food Studies, 2, 47-81. King, M. (2014). Is woolworths BUY? Retrieved October 2, 2014, from The Montly Fool: http://finance.ninemsn.com.au/article.aspx?id=8744178. Woolworths Limited (2014, October 3). Share Price . Retrieved October 3, 2014, from Woolworths Limited: http://www.woolworthslimited.com.au/page/Invest_In_Us/Share_Price Read More