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The main aim of this report is to provide a fruitful advice to the client, who wants to invest in Woolworths Ltd with the purpose to maximize the returns. This report discusses the company’s core business including description about its operating activities. In addition, it also discusses the progress of the company against its strategic priorities. It also identifies and discusses any significant issue emerging from the reports by Chairman, managing director, and the corporate social responsibility report. It also presents the financial performance of the company on the basis of calculation and interpretation of key financial ratios. It also evaluates the creation or reduction of the company’s value in terms of “six capitals” over time. In last, it provides recommendations on investing in Woolworths Ltd.
In Australia, Woolworth Ltd is a public company and ranked number 2 out of the 2000 top companies (IBIS WOrld, 2016). The major part of its income comes from the Supermarkets and Grocery Stores in Australia industry. The core business of the company is related to the retailing of food, liquor, and petrol. In addition, it also operates as a retailer of home improvement and general merchandise (Annual Report, 2015). It also operates in the gaming and hospitality sector. The main operating activities of Woolworth is as below:
Supermarkets and Petrol:
‘Approx 992 supermarkets are operated by Woolworth, 5 Thomas Dux grocery stores, 184 Countdown grocery stores (in New Zealand), and 530 petrol stations’ (IBIS WOrld, 2016).
Endeavour Drinks Group:
The company also operates its liquor businesses both online and offline. It sells liquor online and in-store through its businesses including ‘Dan Murphy’s, BWS, Cellarmasters, Langtons and winemarket.com.au.’ (Annual Report, 2015).
BIG W:
About 186 Big W discount department stores are also operated by the company in Australia. The main operating activities in these stores include ‘selling of hardware, software, health & beauty products, books and stationery, homewares, toys, sports equipment, clothing, recorded media, automotive goods and pet food’ (IBIS WOrld, 2016).
Masters Home Improvement:
Under this brand, which was launched in the year 2011, the company retails more than 35,000 products. The company also operates this brand online (Annual Report, 2015).
Hotels:
Woolworth also operates 331 licensed venues and gaming operations throughout Australia through its majority-held subsidiary, Australian Leisure & Hospitality Group (IBIS WOrld, 2016).
Financial Services:
The company’s operations also include the management of financial services through its division Woolworths Money (IBIS WOrld, 2016).
Woolworths Rewards:
The management of rewards point system also comes under the operating activities of the company.
Ezibuy:
The firm’s operating under the apparel and homeware catalogue market includes Ezibuy, which sells many products to customers through catalogues, a call centre, retail outlets and online order (IBIS WOrld, 2016).
It is identified from the current growth plan of the company that there are four key strategic priorities for Woolworth. These include ‘extend leadership in food and liquor, maximize shareholder value by acting on its portfolio, preserve the record of establishing new growth businesses, and invest in the enablers for a new growth era (Woolworth Limited, 2012). The company significantly progressed against all its strategic priorities. For instance, to extend leading position in the food and liquor business, the company considerably progressed. For example, in the contest of food group, the company inserted the customers as an integral part of the core of all decisions, invest more than $200 million in price to show price parity with Coles, enhance service hours to ensure fresh and on-shelf availability, and established a new leadership team (Annual Report, 2015). In addition, Woolworth is the Australia’s first retailer to sign the ‘Australian Food & Grocery Industry Code of Conduct’, which make sure about the certainty for food and grocery suppliers and greater transparency. It shows that in the year 2015, the company improved its leading position in the food market.
Moreover, in relation to the Liquor Group, to strengthen the leadership, the company successfully launched a new loyalty program in year 2014, which is beneficial to effectively engage customers. Additionally, the company also built ‘danmurphys.com.au’ as a prime online liquor destination in Australia (Annual Report, 2015).
At the same time, Woolworth’s efforts to maintain an effective remuneration policy that is aligned with its business strategy and also match with its business values and culture, significantly contributed to enhance shareholder value. In addition, the company also strengthen its current portfolio by increasing investment that also ensures growth in total shareholder value (Annual Report, 2015). Woolworth also opened 14 new petrol sites, extended its offer by rolling out Bulk Food and raised the number of online products. All these support the company to maintain its record to develop new growth businesses. Additionally, in the year 2015, the company significantly invests to develop HR capabilities. The company also made significant changes in the senior management team with the focus to develop people, who can lead the business to new growth era (Annual Report, 2015). It shows that the company progressed effectively to ensure the attainment of its strategic priorities.
It can be discussed based on the report of the chairman that several issues are emerging that can adversely impact on the company’s position in the Australian market. The chairman said that the fiscal year 2015 was a challenging one for Woolworth. It is because during this year, the company made a number of substantial changes to the senior management team with the purpose to enhance customer satisfaction and deliver long-term shareholder value (Annual Report, 2015). It creates the issue for the company to successfully involve new senior managers in the business and increase coordination and cooperation within the team. In addition, it can also be discussed that the changes at Woolworth also create new retail challenges for the company in terms of ensuring the effectiveness of its strategy to meet challenges and speeding the lean retail model to compete in the new environment.
The report also reflects that the group sales were decrease by 0.2% in the year 2015 over year 2014. The main reason behind this was lower fuel sales. It shows the issue of improving fuel sales as petrol is a core business of the company. Additionally, it can also be discussed that it is also an issue for the company to proven its current business and marketing strategies to increase sales revenue in highly dynamic and competitive retail business environment (Annual Report, 2015).
From the report by the managing director, it is found that in year 2015, the company faced a issue to deliver growth as profits do not significantly improved over the previous year. It is also assessed that dramatic changes in the market environment such as emergence of stronger competition and changes in the shopping behaviour of the customers also creates several issues related to enhance sales revenue, firm’s profitability position, and ensure the success of current retail model (Annual Report, 2015). It also creates the issue for the company to continuously improve the customer experience as well as increase net profit. There is also need for the company to provide strong sustainable returns to the stakeholders at the same time increasing customer satisfaction rate. The other issues for the company are identified as recover its leading position in the Australian supermarket, improve market share in the liquor business, get better the business profitability, and maintain disciplined portfolio management (Annual Report, 2015).
It is also identified from the report that the current managing director is retiring from the company. Thus, it also creates the issue to appoint a new talented and experienced managing director, who will work in the company’s best interest. Moreover, there are also other issues for the company to improve sales of different divisions, mainly petrol business, increase overall profitability for Woolworth and maintain its leading position in the industry (Annual Report, 2015).
Woolworth Limited launched a sustainability strategy eight years ago that support it in maintaining a leading position in the retail industry and among peers. It is also found that the company successfully attained most of the CSR targets in the year 2015. The main issue that is emerging from the CSR report is related to failure of the company to attain zero food waste to landfill (Corporate Social Responsibility Report, 2015). In addition, there is also need for the company to keep a focus on the continuous improvement to enhance the effectiveness of its CSR efforts. But, at the same time, it is also evaluated that Woolworth ensures compliance with the principles related to human rights, environment, labour, and anti-corruption.
The below table summarizes the calculation of main financial ratios for the year 2015:
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Ratios Calculation for Woolworth Ltd amount in $ million |
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2015 |
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Liquidity Ratios: |
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Current Ratio |
Formula = Current assets/Current Liabilities |
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Current assets |
7,660.90 |
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Current liabilities |
9,168.60 |
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Current Ratio |
0.84 |
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2012 |
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Profitability Ratios: |
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Gross Profit ratio |
Formula = (Gross profit/ Net sales)*100 |
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Gross profit |
16523.60 |
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Net Sales |
60868.40 |
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Gross profit margin Ratio |
27.15 |
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Net profit margin |
Formula = (Net profit/ Net sales)*100 |
|
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Net profit |
2137.40 |
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Net profit margin Ratio |
3.51 |
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Return on Total Assets |
Formula = (Net profit/Total Assets)*100 |
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Total Assets |
25336.80 |
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Return on Total Assets Ratio |
8.44 |
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Return on Equity |
Formula = (Net income/Shareholders’ Equity)*100 |
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Shareholders’ Equity |
11132.00 |
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Return on Equity Ratio |
19.20 |
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|
2012 |
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Efficiency Ratios |
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Debtors Turnover |
Formula =Net Sales/total receivables |
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Net Sales |
60868.40 |
|
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Total Debtors |
885.20 |
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Debtors Turnover Ratio |
68.76 |
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|
|
|
|
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Inventory Turnover Ratio |
Formula = COGS/Inventory |
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COGS |
44344.80 |
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Inventory |
4872.20 |
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Inventory Turnover Ratio |
9.10 |
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Total assets turnover |
Formula = Net sales/total assets |
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Net Sales |
60868.40 |
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Total assets |
25336.80 |
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Total assets turnover Ratio |
2.40 |
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Solvency Ratio |
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Debt-Equity ratio |
Formula = Long-term liabilities/shareholders funds |
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Long-term Liabilities |
5,036.20 |
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Shareholders’ Funds |
11132.00 |
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Debt-Equity ratio |
0.45 |
IIRC defined Six capitals such as financial, manufactured, intellectual, human, social and relationship, and natural, which are used for evaluating the value creation or diminution by the company (Haslam and Sikka, 2016).
Financial:
In the above section, key financial ratios are calculated to evaluate the financial performance of the company. It is analyzed from the current ratio that short-term liquidity position of the company is not good because there is lack of current assets to meet effectively all short-term obligations (Vemic, 2010). Concurrently, it is analyzed from the profitability ratios that the profitability position of the company is good as there is positive gross profit, net profit, and return on assets and equity ratios. However, it can also be discussed that as the net profit ratio is low (3.51%), there is need to strengthen the current profitability position to retain investors’ trust. Additionally, from the efficiency ratios, it is evaluated that the management at Woolworths is efficient to effectively manage receivables, inventories and assets, as these ratios are high for the company (Fabozzi & Drake, 2009).
At the same time, it is assessed from the interpretation of debt-equity ratio that long-term solvency position of the company is good. It is because the company has fewer long-term debts, which develop its capability to get more funds from the market (Tracy, 2011). Overall, it can be stated that the financial position of the company is good in the year 2015. But, concurrently, it needs to strengthen its short-term solvency and liquidity position to maintain its leading position in the industry.
Manufacturing:
The company highly invests in buildings, equipments, and infrastructure to ensure the uninterrupted production of goods and services as per customers’ expectations (Integrated Reporting, 2013).
Intellectual:
Woolworth has developed a strong reputation in Australian Market as it is placed number 2 among the top 2000 companies (Woolworths Limited, 2012). It is also evaluated that some of Australia’s most recognised & trusted brands are managed by Woolworth. These include ‘Countdown, Thomas Dux, Woolworths Petrol, Endeavour Drinks Group, Big W, Masters’ Home Improvement, ALH Group (hotels), Woolworths’ Money, and EziBuy’ (Woolworths Limited, 2012). In addition, it is found that the company developed a new merchandising system with the purpose to get better insights into trading and inventory management as the business perspective is changing towards soft goods (Annual Report, 2015).
Human:
Woolworth significantly invests in strengthening the organizational human capital. It is assessed that worldwide the company is known for its strong, hard working, down to earth, ethical values, and a responsible culture (Woolworths Limited, 2012). The company employs approx 190,000 plus employees with different experiences, skills, competencies, and capabilities. The employees are highly committed to create great customers’ experience as well as ensure firm’s long-term business survival (Annual Report, 2015). It is found that the company develops effective people policy, considers ethical values, and provide performance based rewards. All these are beneficial to increase employee motivation, retain them for long-period, and enhance their ability to effectively collaborate and lead the business successfully (Adams, 2015).
Social and Relationship:
The company strives to be fair, reliable, open, and transparent in everything what it do. It also develops fair and close relationship with customers, business partners, and suppliers (Woolworths Limited, 2012). It is found from the company website that it values its supplier by valuing and working collaboratively with them. In addition, it also considers customers at the core of its business and decision-making, and also respect the communities its serve.
Natural
The company uses different natural capitals including water, land, and biotic and abiotic assets to ensure the success of its business. In addition, it is also assessed that Woolworth developed a sustainability strategy that improve efficiency of its operations, reduce waste, and save water and other resources (Corporate Responsibility Report, 2015). Thus, it shows that the group work effectively to ensure optimum utilization of natural capital for now and in the future.
Overall, it can be stated that all the six capitals create value for the company.
Based on the above analysis of Woolworth Limited, it can be recommended to the client that it should invest in the company. It is because as the group significantly invests in all the six capitals resulting in the creation of value for Woolworth, it would be beneficial to attain considerable returns from the investment. In addition, it is also found that despite the lower profits in the year 2015, the company provided significant returns to the shareholders. It shows that the company believes to maintain shareholders’ trust in the business. At the same time, as Woolworth is Australia’s number 2 business with following effective workplace health and safety standards as well as maintain ethical relationship with suppliers, all these show that the investment in this company would be beneficial for the client.
Conclusion
From the above discussion, it can be stated that a company can effectively perform in terms of both financial and non-financial by investing in different capitals including intellectual, human resource, manufactured, natural, social and relationship, and financial. It can also be stated that the investment in Woolworth would be beneficial for the client as the company has potential to create more value and returns for different stakeholders.
References
Adams, C. (2015). Understanding Integrated Reporting: The Concise Guide to Integrated Thinking and the Future of Corporate Reporting. Do Sustainability.
Annual Report (2015). Retrieved from https://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf
Corporate Responsibility Report (2015). Retrieved from https://woolworthslimited2015.csr report.com.au/files/Woolworths_CSR_2015.pdf
Fabozzi, F.J. & Drake, P.P. (2009). Finance: Capital Markets, Financial Management, and Investment Management. USA: John Wiley & Sons.
Haslam, J. and Sikka, P. (2016). Pioneers of Critical Accounting: A Celebration of the Life of Tony Lowe. Germany: Springer.
IBIS World (2016). Woolworths Ltd – Premium Company Report Australia, 2015. Retrieved from https://www.ibisworld.com.au/car/default.aspx?entid=7
Integrating Reporting (2013). Capitals. Retrieved from https://integratedreporting.org/wp-content/uploads/2013/03/IR-Background-Paper-Capitals.pdf
Tracy, J.A. (2011). Accounting For Dummies. USA: John Wiley & Sons.
Vemic, M.B. (2010). Elaboration of Key Aspects of Financial Planning In Entrepreneurial Endeavours. Economics and Organization, 7(4), pp. 411 – 421.
Woolworth Limited (2015). How we do business. Retrieved from https://www.woolworthslimited.com.au/page/Who_We_Are/How_We_Do_Business/
Woolworth Limited (2015). Our Brands. Retrieved from https://www.woolworthslimited.com.au/page/Who_We_Are/Our_Brands/
Woolworth Limited (2015). Strategy and Objective. Retrieved from https://www.woolworthslimited.com.au/page/Who_We_Are/Strategy_and_Objectives/
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