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Woolworths faces months of turmoil

Published: 28 August 2008
Investment bank heaps pressure on general retailer with a damning verdict on the retail business, its format, and the company's financial stability
Seymour Pierce has issued a sell into strength note on Woolworths and passed a damning verdict on the retailer's viability.

The note questioned how much further Malcolm Walker's bid will progress, the retail business's format, and speculated on how close Woolworths will come to breaching its banking covenants with estimated average debt of £208m (2008/09).

A synopsis following a company visit read: "We expect the offer from the Malcolm Walker consortium to falter partly because it appears to be 'too wide of the mark'.

"While there are no easy win strategies for Woolworths, our sum-of-the-parts value indicates still further downside to the share price, and with losses set to continue, the company will come close to breaching its convenants."

The review adds that Malcolm Walker, if successful, will re-emphasize Woolworth's value credentials by introducing a homewares value range, extending the toy offer and cutting the CD and DVD ranges.

It goes on to question whether a format that 'does not have dominance in any of its core categories' and is highly Christmas dependent can reverse sales losses against very aggressive competition (both bricks and mortar, and the internet) despite gains in games consoles and toys and with value brand, Worthit!

Steve Johnson, the new ceo, has a major challenge Seymour Pierce says as he will have to cut costs aggressively at head office and in stores, and bolster the business in readiness for a break-up.

It adds: "He is also likey to renegotiate terms with suppliers, tighten up on capital expenditure and renegotiate pension arrangements."

The bank forecasts operating losses for 2008/09 near £30m before taking into account property profits and other costs.

"We believe the Woolworths format will continue to be loss making," Seymour Pierce concludes.


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