Woolworths’ stock price would more than double if the company adopted a radical new strategy based on shareholder returns rather than sales growth, according to a new report from Bank of America Merrill Lynch.
In a note out today, BAML retail analyst David Errington said the company should axe its non-performing Masters home improvement and BIG W brands and concentrate instead on its supermarket division. Woolworths (WOW) was spending $2.5 billion on new store rollouts which were not generating returns, the report says.
Mr Errington said the company could generate an extra $1.5 billion in free cash flow which, if devoted to its supermarket division, would help it defeat rivals Coles and Aldi.
He said the problem is that management is intent on growing sales and profits and not returns to shareholders, which is why it is pursuing its present strategy.
Woolworths’ stock, which is now tracing at $28 a share, would be trading at more
like $67 a share if it pursued the strategy outlined by BAML, the note said.
The retailer is losing money on its Masters hardware roll out and its BIG W stores are not generating decent returns.
Mr Errington said the retailer needs to adopt a more shareholder-friendly focus, starting with returning the $2 billion in franking credits sitting on its balance sheet.