Woolworths profit to fall first time in 16 years
The broker has gone out on a limb, cutting its price target for Woolworths to $25 from $27 – compared with Wednesday's close of $30.90 – after downgrading earnings forecasts by 5 per cent to $2.52 billion in 2016 and 13 per cent to $2.39 billion in 2017. These new forecasts are well below current consensus forecasts of $2.72 billion for 2016 and $2.87 billion for 2017.
Merrill Lynch's lead retail analyst, David Errington, believes the retailer will achieve 4.5 per cent underlying net profit growth this financial year, towards the bottom end of the company's 4 per cent-to-7 per cent guidance, which was reaffirmed at the annual meeting last week. To achieve this growth, Merrill Lynch expects EBIT-to-sales margins in Australian supermarkets (excluding liquor) to increase 33 points to 8.80 per cent in 2015 from 8.47 per cent in 2014.
However, Mr Errington believes the continued growth in grocery margins will undermine Woolworths's competitive position, triggering deteriorating same-store sales and ultimately a fall in margins.
Earnings from BIG W were also expected to deteriorate, while losses from Masters would rise.
Woolworths is under pressure from many analysts to sacrifice its world-beating grocery margins and cut prices harder to overcome consumer perceptions its prices are not as cheap as those at major rival Coles.
Source: smh.com.au
