Australia Supermarket Price War Leaves Bears at Woolworths? Door
By Adam Haigh
(Bloomberg) — Options traders and short sellers are
betting that Woolworths Ltd. will end up the loser in a price
war among Australia?s largest supermarkets.
Short interest in Woolworths is near the highest on record,
equaling 6.8 percent of outstanding stock after more than
doubling this year. Equity derivatives that pay out if the
shares decline are the most expensive since 2012. The shares
slumped 17 percent in the past 12 months.
Woolworths, the biggest supermarket chain in Australia
which made about $32 billion in food and liquor sales last
fiscal year, is reducing prices to fend off Wesfarmers Ltd.?s
Coles and German discounter Aldi. Chief Executive Officer Grant
O?Brien, who has pledged to restore the double-digit earnings
growth that characterized the company for more than a decade,
last month unveiled a profit-forecast cut that sent the stock
down by the most since 2008.
?Woolworths is falling short of lofty expectations and
being punished,? said Crispin Murray, Sydney-based head of
equities at BT Investment Management Ltd., which manages about
$55 billion. ?Woolworths is facing a number of structural
pressures that will lead it to underperform.?
Analysts expect retaliation from Coles and Aldi to price
cuts, leading to weaker sales growth and declining profitability
across the supermarket industry. Staples are getting cheaper,
with Woolworths lowering prices of bread, milk and toilet
tissue.
Hardware Losses
David Errington at Bank of America Corp. doesn?t like the
other parts of Woolworths? business either, calling for the
company to jettison its Big W mid-range department store chain
and its Masters hardware division, which posted a A$112 million
first-half loss. Units other than Woolworths? supermarkets
provide about 13 percent of the company?s revenue.
Options that pay out on a 10 percent decline in Woolworths
shares cost 5.3 points more than contracts betting on a 10
percent gain, according to three-month data compiled by
Bloomberg. The relationship known as skew climbed to the highest
since June 2012 on March 24.
It?s ?likely to get worse before it gets better,? said
Ben Gilbert, Sydney-based analyst at UBS Group AG who advises
selling the shares. ?Woolworths has lost momentum and needs to
reinvest in its business to regain the trust of consumers and
win share back from its rivals.?
Claire Kimball, a spokeswoman for Woolworths in Sydney,
declined to comment on the options trading. The shares lost 0.5
percent to A$29.48 on Monday in Sydney.
Short interest on outstanding shares surged to 7.6 percent
on March 23, according to data compiled by Markit Ltd. and
Bloomberg. That was the highest level since the year data began
in 2006. It?s risen from 2.9 percent at the end of last year.
Ten of the 16 analysts researching Woolworths tracked by
Bloomberg advise selling the shares.
Shares Fall
Woolworths? share-price slide in the past 12 months
compares with an 8.9 percent gain on Australia?s benchmark
equities gauge, the S&P/ASX 200 Index. That?s left the company
trading at 14.8 times estimated earnings, compared with 20.2
times for its rival Wesfarmers, according to data compiled by
Bloomberg.
A struggling Australian economy isn?t helping the consumer
firm. The country?s central bank lowered its growth and
inflation forecasts in its quarterly monetary policy statement
last month. Without signs of inflation, the stock will continue
to trail the benchmark index, said Ben Le Brun at OptionsXpress
Australia.
?There?s no support for the share price for the
foreseeable future,? said Le Brun, Sydney-based market analyst
at OptionsXpress, a unit of Charles Schwab Corp., which trades
futures and options. ?You?d need to see inflation creeping back
into the Australia economy and when we see that it?ll have a
knock on effect to Woolworths.?
Profit Projection
Profit will increase at a pace in the lower end of a 1.8
percent to 6.6 percent range in the current fiscal year, CEO
O?Brien said Feb. 27. That was just three months after the
Sydney-based firm reaffirmed its forecast for earnings to expand
in a 4 percent to 7 percent range. Tjeerd Jegen, Woolworths?
managing director for supermarkets and petrol, left last month.
?With elevated earnings risks, investors should continue
to avoid the Australian supermarkets,? said Thomas Kierath,
Sydney-based analyst at Morgan Stanley. ?Margins now appear to
have begun declining.?