Chad Slater

Tom Petty wrote that "learning to fly...coming down is the hardest thing". Both Woolworths management and investors must wonder - where did it all go wrong? Morphic have been short the stock since $33 and outline our thoughts as global investors in the context of other offshore food retailers. And the viewing ain't pretty. Essentially Woolworths investors have made money out of Australians overpaying for their food and that is ending. The main Food and Liquor division has been "over-earning" for the better part of a decade and competitors in different guises (Coles through 'fixing' itself and Aldi through it's growth) have used the time to consolidate and grow. So where to? For that please read the full article here: (VIEW LINK)



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Chris Titley

Great article Chad. Any view on what they should do with Masters?

Chad Slater

Looks like we "Bottom ticked it" with our piece! I'd say KKR are thinking (if it's true) the same as what David Errington wrote in his upgrade note from Merrill Lynch last week - cut that business, or at the very least stop spending a few hundred million of CAPEX on it to increase free cashflow. You won't see it in EPS, but improves sustainability of of overall business if they need to lower prices in the Food division. Then assess chances of rehabilitation. My issue with the buyout idea is, the aim is generally to buy UNDEREARNING businesses not OVEREARNING ones. But hey, who am we to tell KKR where to spend their money? But we've covered half of our short this morning anyway - as per last paragraph of note, without more downgrades it is hard to go lower in the short term. Better to walk away with a good profit and reassess later.

James Marlay

Does your short thesis hold up under this scenario or does this put a floor under WOW?

Chad Slater

You mean a Bid or the Masters changes? Clearly bids are the biggest risks to any short thesis and whether our thesis is right or wrong, it doesn't matter - we lose. Bid rumors now will likely provide a floor in the $26-28 range. Assuming there is no bid, we turn back to the underlying story. To be honest, in my opinion, Masters is a sideshow ultimately. Even assuming its worth nothing (which is unlikely) its $3bn. The market cap of WOW is $34bn, so less than 10%. What's much more important is the sensitivity table in there to Food and Liquor margins, which shows lower margins have a much greater impact to the DCF valuation. What Masters is, is a symptom of a poor decision making process -call it the runny nose, not the virus (if I'm to torture an analogy!)

Chris Titley

Great insight Chad. It seems like the market is running off this article (s) re:KKR ..it's a bit strange , unless it's shorts like you covering for a "just in case"? Any view on WES?

Chad Slater

I learnt the hard way many years ago that Australia is a small market and Journos that go to print with stories tend to be on the money more often than not. On WES - no real opinion. Many moving parts and not a clean play on the short side. Clearly the market darling where the long only Aussie funds are hiding for their retail exposure, but given Like for Like sales growth is intact, wouldn't have a bet either way for now.