The Woolworths Group Ltd (ASX: WOW) share price is down after revealing its HY24 update and a massive impairment.
Woolworths has Australian supermarkets, New Zealand supermarkets, Big W, it owns business food suppliers like PFD, and a variety of other retail platform businesses.
Large impairments
Woolworths said during this half it has made significant progress on its Woolworths New Zealand transformation, with 34 stores rebranded to Woolworths with “positive customer sentiment and improved relative sales performance in these stores”.
Its New Zealand business relaunched “key price mechanics and in-store value communication” which led to customer basket and unit volume increases. The business also launched the e-commerce offering Milkrun in 32 stores, increasing convenience for customers.
However, despite the above progress and the “improvement in sales momentum” towards the end of the second quarter, the trading performance with New Zealand food has “continued to be challenging” with the FY24 first half EBIT (EBIT explained) expected to be NZ$71 million, 42% below last year.
Woolworths pointed to a weaker medium-term market outlook, the time for the transformation initiatives to reach full potential, and the impact of higher interest rates on discount rates, the company decided to recognise an impairment of NZ$1.6 billion as a significant item, against the current goodwill balance of NZ$2.3 billion.
In other words, Woolworths is making an accounting change to the balance sheet value of its New Zealand business.
Another impairment
Woolworths also decided to change how it accounts for its 9.1% interest in Endeavour Group Ltd (ASX: EDV) – it used to own this business entirely. The company thinks it no longer has significant influence, so it will derecognise its equity-accounted investment, and instead it will be shown as a financial asset, measured at fair value.
This will mean Woolworths won’t include a share of Endeavour’s generated profits after this result, but HY24 will include a share.
Based on Endeavour’s share price of $5.21 on 31 December 2023, Woolworths is expecting to report a loss of $209 million, with any subsequent gains or losses of the share price to be recognised in ‘other comprehensive income within equity’.
Trading update
Woolworths said despite New Zealand food and Big W having a challenging half (and those segments seeing weaker EBIT), the Australian Food and PFD financial performance has “remained solid”.
The company’s EBIT before significant items for HY24 is expected to be $1.68 billion to $1.7 billion (compared to $1.64 billion in HY23) which would be growth of between 2.8% to 3.8%.
Final thoughts on the Woolworths share price
The business has done well to keep growing its underlying EBIT, which is a good sign for shareholders. The impairments are unfortunate, and hurt the numbers on the balance sheet, but I don’t think it will affect Woolworths in the long-term.
I wouldn’t call it a great buy at this price, but’s promising that it continues to grow its Australian food business.
For me, there are other ASX dividend shares that could grow more in the long-term, or have a better yield.
