Profits at the stores arm are likely to be connected to the retailer’s strategy of downsizing units and reassigning operating leases, prompting some to question whether Woolworths has a future in its present form.
Pali International analyst Nick Bubb is sceptical of Woolworths’ ongoing ability to keep its shops’ heads above water. “They’re getting their profits from deals with landlords. There’s a big element of property in this so-called return to profitability,” he said. “It may continue as a source of revenue but, given the pressure on the top line, they may well fall back into loss later this year.”
However, Panmure Gordon analyst Christian Koefoed-Nielsen believes it is too early to write off Woolworths and that its value heritage can be further exploited through initiatives such as the roll-out of the Worth It! Value range. He also sees potential in the development of Woolworths’ Ladybird and Chad Valley brands overseas.
A sustained return to profit at Woolworths’ retail division would open the door to a break-up of the group, which includes entertainment supplier EUK and BBC joint venture 2Entertain.
Earlier this month, broker HSBC initiated coverage of Woolworths with an overweight recommendation. Analyst Paul Rossington noted: “Woolworths is a strong recovery candidate with considerable potential for realising shareholder value by disposing of its joint venture investments and, subject to ongoing profitability, demerger, sale or management buy-out of core operating divisions.”
Panmure Gordon expects Woolworths to report pre-tax profits of about£26.5 million on sales of£3.05 billion next week.
One analyst, who asked not to be named, believes further value could be extracted from Woolworths’ 824-strong store portfolio. He said that the resulting chain, although smaller than at present and generating a lower turnover, would be more profitable.
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