Financial Performance, Leases, And Sustainability Of Woolworths

Financial Performance

Part 1

Woolworths is the supermarket chain from Australia that is owned by the Woolworths Limited. It closely works with the Australian farmers and growers to assure the best quality of products to the customers. Looking at the annual report of the company for the year ended 2016 the following details are found –

1. No of independent directors – out of the total directors, there are six directors who are independent who falls under the non-executive category.
2. Gender of the directors – out of total 13 directors who were in the board during the year 2016, 7 directors were male and 6 directors were female.
3. Qualification of directors –

• Jillian Broadbent AO: She has done B.A in economics and maths from the University of Sydney
• Holly Kramer – she has done B.A with Honours in Political science and economics from the Yale University and also done MBA from the Georgetown University
• Scott Perkins – he is qualified with bachelor of laws with honours and bachelor of commerce from the Auckland University.   

1. Experience of directors

• Jillian Broadbent AO: she was the member of Board of Reserve Bank of Australia and was also served as director of the ASX Limited, Special Broadcasting Service Corporation, Coca-Cola Amatil Limited, Westfield property Trusts, Quantas Airways Limited and Woodside Petrolium Limited. She has wide experience regarding corporate finance and banking internally and in Australia both, particularly with the bankers trust Australia (Woolworths Supermarket – Buy Groceries Online 2017).
• Holy Kramer: she has more than 20 years of experience in sales, marketing and general management including the role at Ford Motor Company, Telstra and Pacific brands. Further she was the group managing director, chief of the marketing and in product management of Telstra. Moreover, she was the CEO of Best & Less which is the subsidiary of the South African retail group Pepker.  
• Scott Perkins: he has wide international and Australian experience as the leading corporate advisor. Further, he was the head of the corporate finance under Deutsche Bank New Zealand and Australia. Moreover, he was the member of the management committee of Investment bank and the member of Asia Pacific Corporate.  

1. Involvement in other board –

• Jillian Broadbent – Chair of Board under Swiss re Life & Health Australia Limited.
• Holly Kramer – Non-executive director of the Nine Entertainment Corporation and AMP Limited Australia.
• Scott Perkins – Non-executive director of the Brambles Limited, Museum of Contemporary Art in Sydney, Origin Energy Limited and the New Zealand initiative.

Introduction

The main objective of this report is to focus on the financial performance of the Woolworths Group for the past 3 years to be presented at the annual general meeting of the company. The report will focus on the profitability aspect of the company, dividend payment to the shareholders and the changed in the owner’s equity. The report will also take into consideration the company’s future growth aspect and social and environmental sustainability and various challenges faced by the company in the industry from various sources like from competitors.  

If the profitability aspect of Woolworths is considered, it is recognizes that for the year ended 2016, the company was not able to generate any profit and the net loss of the company amounted to $ 1235 million. However, it can be recognized from the past results of the company that the company’s profitability position for past three years that is for the year ended 2013, 2014 and 2015 were quite stable and the amount of profit for the company were $ 2,249 million, $ 2,452 million and $ 2,146 million respectively for the year ended 2013, 2014 and 2015. However, one of the main reasons behind the loss during 2016 was due to the increase in sales, administrative and general expenses of the company that went up to $ 10,930 million from $ 3,499 million of 2015. Analysis of the profitability trend will assist the company to evaluate the least profitable and most profitable sector, optimize the responses towards the requirement of the customers and evolve the mix of the product to for maximizing the profits for short term as well as long term.

Looking at the record of dividend payment, it is found that the company is stable in paying the dividend if the last four years are considered. The amount of dividend that was paid during the years are $ 1,417 million, $ 1,523 million, $ 1,567 million and $ 1,217 respectively for the year ended 2013, 2014, 2015 and 2016. On the other hand, the changes in owner’s equity were as follows –

Year	2013 (million)	2014 (million)	2015 (million)	2016 (million)
Owners equity	$ 9,028	$ 10,253	$ 10,834	$ 8,471

From the above table, it can be identified that there was no specific trend with regard to the equity. However, it can be found that till the year ending of 2015 it was in increasing trend and then it fell during the next year. From $ 9,028 million in 2013 it reached to $ 10,834 million in 2015. However, it dropped to $ 8,471 million during 2016 which was lower for the last 4 years.

With regard to recognition of opportunity for future growth, it is found that the company has a multi-pronged approach for expanding the operation of the company in Australia. Further, they announced that they have a plan of creating 10,000 new jobs in retail sector before the closing of the present financial year as well as they have a five year plan of doubling their sales under the supermarket brands (Beneke et al. 2013). Further, they outlined the three-year strategy for winning the trust of their customers and enhancing the share of the customer with regard to the food spend through minimization of prices and improving all the aspects with regard to the customer experience. The company will primarily focus on three major principles –

• Efficiency – generation of customer value through organization of success and execution of the lean retail model
• Growth – innovation for meting up the more requirements of customers
• Offer – improvement of core offer for ensuring that the customers prefer the company.

Leases and Their Advantages/Disadvantages

Further, the new products to be introduced by the company are to take insights from the customers and deliver the value and quality. Moreover, the new products to be introduced will be refereed as phantom brand and that brand is not actually national brand, however, it will be at private levels of super market that will be disguised as brand.

1. Challenges faced by the company – various challenges faced by Woolworths are as follows –

• Slowing growth rate of market
• Weak morale of the staffs
• Entry of Aldi into WA and SA
• Discounting of market

With the plan of gaining the presence in east coast, the company Aldi is planning to expand their business is Western Australia and South Australia. Lidl, the supermarket chain from German also succeed in the international market and therefore planning to open more stores in Australia (Delbridge et al. 2013). Further, the largest threat to the company is the growth with regard to price-cut of the supermarkets like Aldi and the expected entry of various other big international rivals like German retailer Lidl. The main reason of these entrants posing as threats are specifically with regard to the fact that they are expected to capture considerable market share and there is huge pressure from the home-focused brand, low cost and retailers generate (Woolworths Supermarket – Buy Groceries Online 2017).

If the environmental and social sustainability of Woolworths is considered, it is found that as per the company’s corporate responsibility strategy 2020, it identifies 20 sustainability goals and corporate responsibility and commitments that are aimed to be implemented till the financial year 2020 (López Prol and Steininger 2017). These commitments and goals cover large range of stakeholders, tem members, customers, communities and suppliers that are associated with Woolworth. Further, they recognize the impact of environment throughout the value chain and works along with their service providers, suppliers and the operations to innovate a healthy planet (Lubbe, Modack and Watson 2014). Further, they will move forward to the circular economy and will source the environmentally sustainable commodities and respond to the climatic changes.

From the above discussion it is concluded that the company’s performance with regard to payment of dividend and owner’s equity is stable and quite impressive. Further, the company considers all the opportunities for the future growth and creating value to the shareholders. It was also found that company is aware about the environment and social responsibility aspect and takes appropriate measures to maintain those. However, the company faces various challenges from the competitors like Aldi and Lidl.

Reference 

Beneke, J., Chamberlain, V., Chohan, R. and Neethling, M., 2015. The effect of corporate reputation on retailer brand equity: A study of two South African grocery chains. Journal of Business and Retail Management Research, 9(2).

Delbridge, T.A., Fernholz, C., King, R.P. and Lazarus, W., 2013. A whole-farm profitability analysis of organic and conventional cropping systems. Agricultural systems, 122, pp.1-10.

López Prol, J. and Steininger, K.W., 2017. Photovoltaic self-consumption regulation in Spain: Profitability analysis and alternative regulation schemes. Energy Policy, 108(C), pp.742-754.

Lubbe, I., Modack, G. and Watson, A., 2014. Financial Accounting GAAP Principles. OUP Catalogue.

Woolworths Supermarket – Buy Groceries Online. 2017. Woolworths Online. Retrieved 16 September 2017, from https://www.woolworths.com.au/

Part 1

The new AASB 16 on leases is applicable from the period beginning on 1^st January 2019. As per the new standard of lease the operating leases shall be shown under the balance sheet along with the liability for lease.  It is identified from the annual report of Woolworths Group that the company’s commitment towards operating leases are restated for including the lease contracts those are legally bound and existed on 28^th June 2015 and those were commenced after that date (Tan?Kantor, Abbott and Jubb 2017).     

Sustainability Initiatives

It was found from the annual report of the company that the company uses finance lease for properties as the expected life of the properties are determined as for 25 – 40 years.  However, the equipments are considered as operating leases as the expected life of the equipments are determined as for 2.5 – 10 (Woolworths Supermarket – Buy Groceries Online 2017).

Further, the company uses particular lease for each items to make it clear that the operating lease are used for buying the major part of any equipment’s useful life. The goods under finance lease are financed through ex-GST and generally have balloon payment at the end of lease term (Xu et al. 2017). On the contrary, the agreement regarding operating lease is undertaken to finance the equipment for the term which is less than the useful life and the lessor has the option to return the equipment at the end of the lease term without any additional obligation (Wong and Joshi 2015).  

It was further recognized from Woolworth’s annual report that the company recorded the leases under borrowings. The main advantages of lease are the initial cash outlay can be avoided and it is an easy source of financing. Further it improves the liquidity position of the company and shifts the obsolescence risk. On the other hand, the disadvantages associated with the lease are it involves higher cost and loss with regard to alteration of the asset. It also deprives the user from using the asset and loss of incentive from ownership (Holland 2016).    

The main objective of the accounting standard AASB 117 is to prescribe the suitable accounting policies for the lessor and lessees and the disclosure requirement applicable with regard to lease. Further, the standard’s objective is to take into consideration and disclose the finance lease and operating lease under the lessee and lessor’s statement.

It is concluded from the above discussion that the lease transfers the ownership of asset to lessee till the end of lease term. Woolworth group uses particular lease for each item to make it clear that the operating leases are used for buying the major part of any equipment’s useful life. It was further recognized from Woolworth’s annual report that the company recorded the leases under borrowings. However, with regard to AASB 16 for Leases, the company not yet assessed the entire effect of new standard and yet to be decided regarding when AASB 16 is to be adopted. Further, AASB 16 will have material impact on the reported liabilities and asset of the company that will further have an impact on the key ratios of the company.

Reference 

Holland, D., 2016. Simplifying income recognition for not-for-profit entities. Governance Directions, 68(11), p.666.

Tan?Kantor, A., Abbott, M. and Jubb, C., 2017. Accounting Choice and Theory in Crisis: The Case of the Victorian Desalination Plant. Australian Accounting Review.

Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3), p.27.

Woolworths Supermarket – Buy Groceries Online. 2017. Woolworths Online. Retrieved 16 September 2017, from https://www.woolworths.com.au/

Xu, W., Xu, W., Davidson, R.A., Davidson, R.A., Cheong, C.S. and Cheong, C.S., 2017. Converting financial statements: operating to capitalised leases. Pacific Accounting Review, 29(1), pp.34-54.

1. The lease agreement will be considered as the operating lease due to the following reasons –

• The term of the lease is less than 75% of its useful life
• The lease can be cancelled
• Triton limited are not expected to buy the machine after the lease term

1. Sale and leaseback agreement – under the sale and leaseback contract the arrangement is made where seller of the asset leases back the unchanged asset from purchaser. The agreement of lease is entered into immediately after sale of asset along with the payment amount and with specific time period (Wong and Joshi 2015). Eventually, the seller of asset becomes lessee and purchaser becomes lessor under this contract. Here, in the given situation Orion Purchased machine from Triton and the same asset were given on lease to Triton Ltd. therefore. It will be treated as the sale and leaseback agreement. Various advantages that can be achieved by Triton limited are that it allows the business for operating from same premises and at the same time it can avoid the associated risks with owning the property (Dakis 2016). Further, the generated working capital is available for reinvestment for the purpose of business growth. Moreover, it enables for the tax benefits as leasing costs are equalized as the operating expenses.

(A) Need for making the adjustments for the intra group transactions

The consolidated financial report of the company includes the group’s statement, the economic entity that includes the parent company and its subsidiaries. Adjustments for intra group transactions are required as they are internal to economic company and it does not reflect the impact of the transactions with the external parties (Locorotondo, Dewaelheyns and Van Hulle 2014). Further, this is consistent with concept of the company for consolidation that defines the company as the net asset from subsidiary and net asset from the parent company. Transactions among these companies shall be adjusted in full amount as both the parties are under the economic organizations.  

(B) Impact of income tax arising from intra group transactions

Accounting for the tax is governed by the AASB 112 on Income tax. Further, the accounts related to deferred tax are accounted for when there is a difference owing to the base of tax of the liability or asset that differs from carrying amount (Ahmed, Habib and Muhammadi 2015). Further, the consolidation adjustment results into altering the assets and liabilities carrying amount. Moreover, where this situation takes place and there takes place a temporary difference as there is no alteration under the tax base. In such circumstances, the entries related to tax effect needs raising of the deferred tax liabilities and assets.

(C) Unrealised profit

Unrealised profits related to the inventory are considered as current asset where the inventory is sold to external parties within the period of 12 months of the acquiring date (Greil and Schilling 2016). When the inventory is sold among the groups of the companies within the period of 12 months and is not sold till the closing of the year, then it is required to consider how this has the impact on the consolidated accounts of the following year. The profit will become realised when inventory will be sold to the external party in next financial year.

Reference 

Ahmed, Z., Habib, A. and Muhammadi, A.H., 2015. Multinational transfer pricing of intangible assets and tax audit adjustments: evidence from Indonesia.

Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance Directions, 68(2), p.99.

Greil, S. and Schilling, D., 2016. Cross-Border Financial Transactions and Arm’s Length Interest Rates: A Two-Step Approach. Intertax, 44(11), pp.802-809.

Locorotondo, R., Dewaelheyns, N. and Van Hulle, C., 2014. Cash holdings and business group membership. Journal of Business Research, 67(3), pp.316-323.

Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting Business & Finance Journal, 9(3), p.27.

Woolworths Supermarket – Buy Groceries Online. 2017. Woolworths Online. Retrieved 16 September 2017, from https://www.woolworths.com.au/