woolworths (wow.ax)

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Equity Research Australia/NZ

Retail (AU)

24 September 2014

Woolworths (WOW.AX) UPGRADE RATING

The Ideas Engine

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ideas.

Improving sustainability and accelerating growth

Supply chain and big data to deliver more growth from the core.

Woolworths is on the cusp of a period of accelerating growth and improving

sustainability of margin from its core food and liquor business.

The company is set to commence a phase of investment to extend its supply

chain and big data capability. Woolworths' scale and the concentrated

structure of the Australian supermarket industry, make the company uniquely

placed to leverage this investment into broadening its position in food retail

and leveraging its scale in food into competitive advantage in non-food. The

result is likely to be a significant broadening of Woolworths' market position

in food and non-food retailing and consequent acceleration in earnings

growth.

Growth to accelerate sustainably over a ten-year period. Relatively

conservative assumptions in relation to an expanded market position would

result in Woolworths growing its revenue at a rate 1-2ppt above market for

the next decade. EBIT growth would accelerate from ~6% p.a. currently to

~10%, with conservative market share and cost assumptions.

Relative value is attractive and improves as a result of accelerating

earnings growth. We have a target price of $42.60 and OUTPERFORM

rating (previously Neutral).

Figure 1: Supply chain to expand growth around the core

Source: Company data, Credit Suisse estimates

Figure 2: Consolidate and increase a scale advantage


RESEARCH ANALYSTS

Grant Saligari 61 3 9280 1720

[email protected]

James O'Brien 61 3 9280 1669

[email protected]

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-U.S ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Price / value

position

Specialist

Product

Food --------> Non-food

Customer

segment

B2B

Woolworths

Premium

Discount

Market

$75bn

Market

$30bn

Generalist

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Un

it c

ost

Relative scale

Woolworths Woolworths future Coles

Woolworths

Coles

Today Product

IDEAS ENGINE SERIES

IDEAS ENGINE 2

Woolworths (WOW.AX)

Woolworths (WOW.AX)

Price (23-Sep-14,A$) 34.9

Market Cap (A$mn) 43920.4

Previous Value Current Value

Rating NEUTRAL OUTPERFORM

Target Price (A$) 39.00 42.60

EPS FY1E (A$) 2.07 2.08

EPS FY2E (A$) 2.21 2.22

EPS FY3E (A$) 2.38 2.48 Source: Credit Suisse Estimates, IBES

Income Statement 2014FYA 2015FYE 2016FYE 2017FYE Revenue 60,952 63,577 67,391 71,155

EBITDA 4,771 4,937 5,282 5,890

Depr. & Amort. 996 1,002 1,076 1,168 EBIT 3,775 3,935 4,206 4,722

Net interest exp. 260 238 236 251 Profit before tax 3,515 3,697 3,971 4,471

Income tax -1,057 -1,109 -1,191 -1,341

Profit after tax 2,458 2,588 2,779 3,130 Minorities -7 33 26 22

Associates & Other 0 0 0 0 Normalised NPAT 2,452 2,621 2,805 3,152

Unusal item after tax 0 0 0 0

Net profit (Reported) 2,452 2,621 2,805 3,152 Cash Flow 2014FYA 2015FYE 2016FYE 2017FYE

EBIT 3,775 3,935 4,206 4,722 Net interest -338 -238 -236 -251

Depr & Amort 996 1,002 1,076 1,168 Tax paid -1,162 -1,109 -1,191 -1,341

Working capital 128 -40 182 163

Other 74 -44 -57 -57 Operating cashflow 3,473 3,506 3,980 4,403

Capex -1,899 -2,095 -2,307 -2,400 Acquisitions & Invest -178 603 0 0

Asset sale proceeds 37 0 0 0

Other 8 0 0 0 Investing cashflow -2,031 -1,492 -2,307 -2,400

Dividends paid -1,523 -1,750 -1,882 -2,051 Equity raised 219 198 185 174

Net borrowings -67 500 1,000 0 Other -1 0 0 0

Financing cashflow -1,372 -1,052 -697 -1,877

Total cashflow 69 962 975 127 Adjustments 4 0 0 0

Net Change in Cash 73 962 975 127 Balance Sheet 2014FYA 2015FYE 2016FYE 2017FYE

Cash & equivalents 923 1,885 2,859 2,986

Inventories 4,693 4,625 4,791 4,944 Receivables 926 970 1,027 1,084

Other current assets 633 633 633 633 Current assets 7,175 8,113 9,311 9,647

Property, plant & equip. 9,601 10,263 11,681 13,114 Intangibles 6,335 6,162 5,976 5,774

Other non-current assets 1,095 1,095 1,095 1,095

Non-current assets 17,030 17,520 18,752 19,983 Total assets 24,205 25,633 28,062 29,631

Balance Sheet (continue) 2014FYA 2015FYE 2016FYE 2017FYE Payables 6,006 5,899 6,246 6,562

Interest bearing debt 4,356 4,856 5,856 5,856

Other liabilities 3,318 3,318 3,318 3,318 Total liabilities 13,680 14,072 15,419 15,735

Net assets 10,525 11,561 12,643 13,895 Ordinary equity 10,471 11,342 12,265 13,366

Minority interests 273 438 597 748

Total shareholder funds 10,525 11,561 12,643 13,895 Net Debt 3,433 2,971 2,996 2,869

Per Share 2014FYA 2015FYE 2016FYE 2017FYE Equiv. FPO (period Avg.) (mn) 1,253 1,262 1,266 1,268 EPS (CS Adj.) (A$) 2.0 2.1 2.2 2.5 Prev. EPS (A$) 2.0 2.1 2.2 2.4 DPS (A$) 1.4 1.4 1.5 1.7 Dividend Payout (%) 70.0 69.4 69.5 69.7 Earnings 2014FYA 2015FYE 2016FYE 2017FYE Sales Growth (%) 3.9 4.3 6.0 5.6 EBIT Growth (%) 3.3 4.2 6.9 12.3 Net Income Growth (%) 4.1 6.9 7.0 12.4 EPS growth (%) 3.2 6.2 6.7 12.2 EBITDA Margin (%) 7.8 7.8 7.8 8.3 EBIT Margin (%) 6.2 6.2 6.2 6.6 Pretax Profit Margin (%) 5.8 5.8 5.9 6.3 Net Income Margin (%) 4.0 4.1 4.2 4.4 Valuation 2014FYA 2015FYE 2016FYE 2017FYE

P/E (CS) (x) 17.8 16.8 15.7 14.0 EV/EBIT (x) 12.5 12.0 11.3 10.0

EV/EBITDA (x) 9.9 9.6 9.0 8.0

Dividend Yield (%) 3.9 4.1 4.4 5.0 FCF Yield (%) 5.5 5.3 6.3 7.1

Price to book (x) 4.2 3.9 3.6 3.3 Returns 2014FYA 2015FYE 2016FYE 2017FYE

Return on Equity (%) 23.4 23.1 22.9 23.6 Profit Margin (%) 4.0 4.1 4.2 4.4

Asset Turnover (x) 2.5 2.5 2.4 2.4

Equity Multiplier (x) 2.3 2.3 2.3 2.2 Return on Assets (%) 10.1 10.2 10.0 10.6

Return on Invested Cap. (%) 18.9 19.0 18.8 19.7 Gearing 2014FYA 2015FYE 2016FYE 2017FYE

ND/ND+E (%) 24.6 20.4 19.2 17.1

Net Debt to EBITDA (x) 0.7 0.6 0.6 0.5 Int Cover (EBITDA) (x) 18.3 20.8 22.4 23.4

Int Cover (EBIT) (x) 14.5 16.5 17.8 18.8 Capex to Sales (%) 3.1 3.3 3.4 3.4

Capex to Depr (%) 230.4 252.7 259.3 248.4 Source: Company data, Credit Suisse Estimates

IDEAS ENGINE 3

Woolworths (WOW.AX)

Figure 3: Supply chain investment to extend a scale advantage in food


Figure 4: Expand scope of business around the core


Figure 5: Invest in high returning business


Figure 6: Value to improve significantly


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Relative scale


Woolworths

Today

Coles

Today Productivit

Price / value

position

Specialist

Product


Customer

segment

B2B

Woolworths

Premium

Discount

Market

$75bn

Market

$30bn

Generalist

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FY00A FY02A FY04A FY06A FY08A FY10A FY12A FY14A FY16F FY18F

Invested capital (RHS, yoy%) ROIC ROIC - ex Masters ROIC - AF&L

ROIC improvement during Project Refresh

NZacquisition

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

WOW PE (LHS) WOW AF&L same store sales growth (RHS)

PE re-rate with stronger sales

CS forecasts

IDEAS ENGINE 4

Woolworths (WOW.AX)

Investment case

A period of supply chain and big data development is likely to challenge the perception

that Woolworths' core food business has low growth

There is a perception that the potential for growth from Woolworths 'core' supermarkets business is low because the company has a high share of the currently defined supermarket industry. In this paper we make the case for that perception changing as a result of a new stage of supply chain and big data development. In our view, that development will emphasise the broadening of supply chain capability (addressing constraints on range, customisation and delivery in the existing supply chain) as well as extending cost advantage in the supermarket supply chain. Supply chain and big data development is likely to enable Woolworths to simultaneously increase technology and scale advantages in food and to leverage its scale in food into a competitive advantage in non-food. The result is likely to be a significant broadening of Woolworths' market position in food and non-food retailing.

Four opportunities to increase scale in food

1. Expanding market share within the currently defined market as a result of increasing a

cost advantage from supply chain investment – market share moving inversely in relation

to relative cost.

2. Expanding market share as a result of stretching its position further along value and

premium dimensions of the customer offer – being able to leverage existing scale into

providing a more customised offer.

3. Building a more significant position in direct to customer and pick up from store delivery

channels.

4. Extending the range of customer segments that it can effectively service – essentially a

customisation opportunity in relation to the needs of food service customers.

The opportunity is substantial along each of those dimensions. Supply chain and big data

enable Woolworths to simultaneously increase cost advantage and flexibility to customise its offer along the dimensions described.

Large opportunity to leverage scale in food into $75bn non-food market

Non-food retail (ex bulky goods and services) is a $75bn market. To date, Woolworths has been unable to leverage its significant scale advantage in food into a competitive advantage in non-food. That constraint has arisen for a variety of reasons – lack of integration of food and non-food supply chains and systems, limitations on supermarket selling space, constraints on the ability to customise range by store and the economics of expanding into larger store formats. In the next range of supply chain development, there is a likelihood that Woolworths will achieve better food and non-food supply chain integration, thus transferring the benefits of scale in food into non-food. The development of its online capability is likely to provide a more

competitive delivery channel for non-food than is available through supermarkets currently due to the ability to provide a broader range at a lower cost than through stores and still achieve synergies in the marketing and delivery of food and non-food items.

Industry structure supports online channel profitability

The online channel has not been universally profitable, and notably there have been profitability issues in the UK market. There are several factors supporting the likely profitability of the online channel for Woolworths in Australia – the high concentration of the Australian supermarket industry which is supportive of profitability, the significant scale advantages in marketing, purchasing and supply chain enjoyed by Woolworths and Coles, which create significant barriers to entry for new entrants seeking to only compete in delivery, and the ability of Woolworths and Coles to utilise their store networks for order online and pick up from store options. Our modelling indicates profitability that is comparable with that of existing supermarkets.

Sizable opportunity for Woolworths

Woolworths' scale and the concentrated structure of the Australian supermarket industry, make the company almost uniquely placed among its peers to leverage its investment into broadening its position in food retail and leveraging its scale in food into competitive advantage in non-food. The prize is material.

Figure 7: The market opportunity


The development is a significant value opportunity as a result of accelerating growth in

a defensive business

The opportunity to add value from accelerating growth in a defensive business is substantial. EBIT growth improves from ~6% CAGR under a non-expansion scenario to ~11% CAGR under the high end of a scenario of expanding market position.

Market opportunity Driver Risk

Food retail market share Relative cost and online 2ppt share 1.9 5ppt share 4.7 Low

Non-food retail market share Food to non-food synergy 2ppt share 1.5 5ppt share 3.8 Medium

Food service distribution B2C to B2B synergy 10ppt share 1.3 20ppt share 2.5 High

4.6 10.9

Growth on AF&L FY14 sales 11.2% 26.6%

CAGR (assuming 10-year delivery) 1.1% 2.4%

Opportunity ($bn)

Low High

IDEAS ENGINE 5

Woolworths (WOW.AX)

Figure 8: Significant strengthening of growth (EBIT CAGR FY14-19)


Figure 9: Relative value improves significantly through the forecast


Figure 10: Strong DCF valuation support across all scenarios


Figure 11: DCF premium to share price across all scenarios


Sales growth (above industry)

CODB 0ppt 1ppt 2ppt

0 6.50% 7.50% 8.40%

-60bp 8.00% 9.00% 9.90%

-90bp 8.70% 9.70% 10.70%

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019



CS forecasts


CODB 0ppt 1ppt 2ppt

0 40.92 42.35 43.81

-60bp 41.15 42.60 44.06

-90bp 41.27 42.70 44.18


CODB 0ppt 1ppt 2ppt

0 18% 22% 26%

-60bp 18% 22% 27%

-90bp 19% 23% 27%

IDEAS ENGINE 6

Woolworths (WOW.AX)

Growth from the core and increasing competitive

advantage

Supply chain transformation in the early 2000s produced a step change in

competitiveness and drove industry consolidation

Woolworths last undertook a large scale transformation of its supply chain through the early

2000s. Initiatives under Project Refresh through that period encompassed a range of management, systems and supply chain changes. The changes improved Woolworths'

competitive position by sustainably lowering cost, lowering working capital and improving on

shelf availability.

Initiatives commenced in 2000 with a period during which centralisation line items and

support activities were centralised. Supply chain changes commenced in 2004 and most

large scale changes were completed by 2008. Supply chain systems continued to be extended through various product categories in the supermarkets business in subsequent

years. Through the period 2000 to 2008, Woolworths spent $1.7bn on supply chain and

related systems, elevating supply chain and systems capex to sales to 3.7% in 2008 from

2.0% in 2000.

Between 2000 and 2008, like-for-like sales growth accelerated and total sales in the AF&L

division witnessed a CAGR of 9% compared with 5% in the six years since 2008. AF&L EBIT margin increased by 280bp and EBIT posted a CAGR of 17%. The ratio of inventory

to sales fell 255bp at a group level, releasing $1,200mn of cash from working capital

compared with a no change state.

Figure 12: Woolworths supply chain investment drives sales and earnings growth


Figure 13: Woolworths supply chain investment drives sales and earnings growth


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Supply chain & Stay-in-Business investment Capex / Sales EBIT growth ex HI (RHS) Sales growth ex HI (RHS)

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Norwest & DCs investment Supply chain & Stay-in-business capex $mnEBIT growth ex HI (RHS) Sales growth ex HI (RHS)

New DC construction &

centralisation of state-based

functions

AutostockR and

Stocksmart

Transport loads and routes

Data

Multi-channel

IDEAS ENGINE 7

Woolworths (WOW.AX)

An improvement in Woolworths' competitive position in food retailing was evident from a

simultaneous expansion of EBIT margin and market share. Woolworths enjoyed the benefits of that investment for a number of years beyond the explicit investment phase.

Figure 14: Woolworths' market share and EBIT margin simultaneously improved


Improving competitiveness from Woolworths' was an important cause of consolidation of the

industry. Dairy Farm left the Australian market in 2001. Foodland was broken up and sold in

2005. Foodland's supermarket business in Australia was acquired by Metcash and onsold to

independent retailers. Following a period of declining profitability, Franklins was sold to

Metcash in 2012. The position of the independent sector weakened, despite benefiting from

the breakup of the aforementioned chains.

Figure 15: Smaller chains left and the industry consolidated


The Australian supermarket industry changed considerably through that period. There was

considerable consolidation of the industry within the mainstream or 'middle' supermarket offer, which became increasingly concentrated. Within the 'middle', Woolworths and Coles

moved from a combined 55% market share of food retail in 2000, to 64% in 2014. Within

the 'middle', the share of non-Woolworths and non-Coles retailers fell, even with the

breakup of Dairy Farm and Foodland during the period. The market share of food speciality

(butchers, bakers, green grocers) fell from 12% in 2000 to 8% in 2014. The only

significant deviations from the middle were the opening of Aldi and Costco. Aldi commenced

in 2000 and continues to establish a position as a narrow range, deep value supermarket. Costco opened its first store in Australia in 2009 and has a niche position, particularly to the

food service sector.

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1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Market share (LHS) EBIT margin (RHS)

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WOW Australian Food & Liquor WES Coles Foodland

Dairy Farm Franklins Pick n Pay Franklins Aldi

Foodworks / AUR CostCo Major IGA chains

Other supermarkets Non-supermarket food retail

Dairy Farm Foodland Franklins

IDEAS ENGINE 8

Woolworths (WOW.AX)

Figure 16: Significant consolidation of market share in the 'middle'

Market share and positioning 2000 … … and 2014


Woolworths' growth slowed post supply chain investment

From 2009, Woolworths came under increasing pressure from Coles, which was improving

its operations during that period under new ownership by Wesfarmers. Price inflation slowed

as a result of Coles narrowing its cost disadvantage to Woolworths.

Figure 17: WOW AF&L EBIT growth ($mn) and food inflation

Source: Australian Bureau of Statistics, Company data, Credit Suisse estimates

At the end of FY14, Woolworths should retain a material productivity and scale advantage.

Differences in sales productivity had become immaterial.

Figure 18: WOW and WES supermarket EBIT differential


A new stage of supply chain is likely to extend Woolworths' position in food

There is a perception that Woolworths' supply chain is efficient. We agree that proposition to

an extent – we would highlight that efficiency is present within a narrow area of capability which is designed to efficiently deliver food from distribution centres to a large store

network. That efficiency is demonstrated by cost and margin differentials between

Woolworths and its competitors in the Australian market. The next stage of supply chain is

likely to emphasise broadening capability as well as increasing efficiency. The broadening of

capability is an important enabler to support an expanded food and non-food market

position.

Why is supply chain linked to expanding market position? Currently, Woolworths' supply

chain is limited in the extent to which it could support a broader food and non-food product

range, limits efficient range customisation by store (and hence the ability to fully capture the

requirements of different customer groups) and limits the expansion of pick up from store

and direct to customer delivery channels. Increasing scale, better data and systems, efficient

online technology and customer behavioral change have created the opportunity for Woolworths to develop its supply chain in ways which have the potential to be every bit as

impactful as the early 2000s.

Food Specialty

12%

Coles26%

Woolworths

29%

Dairy Farm9%

Smkt fringe24%

Price / value position

GeneralistSpecialist

Middle market Food Specialty

8%

Coles26%

Woolworths

38%

Aldi6%

Smkt fringe 22%

Price / value position

GeneralistSpecialist

Middle market

Premium

Value

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IDEAS ENGINE 9

Woolworths (WOW.AX)

Figure 19: Limitatons of the current Woolworths supply chain


We consider four areas of opportunity for Woolworths to extend its position in food which

are likely to be enabled in the next stage of supply chain (and discuss non-food in a

subsequent section):

1. Expanding market share within the currently defined market as a result of increasing

its cost advantage – market share moving inversely in relation to relative cost.

2. Expanding market share by stretching its position further along value and premium dimensions of the customer offer – essentially being able to leverage existing scale

into providing a more customised offer.

3. Building a more significant position in direct to customer and pick up from store

delivery channels.

4. Extending the range of customer segments that it can effectively service – essentially

a customisation opportunity in relation to the needs of food service customers. The opportunity is substantial along each of those dimensions.

Data development intertwined with supply chain

The development of big data capability is intertwined with supply chain and, like supply

chain, the ability to extract tangible benefits are likely to result from the concentrated structure of the food retail market in Australia and Woolworths scale position in that market.

Woolworths is bringing together several elements of data capability. Woolworths has 7.9

million members under its Everyday Rewards loyalty program (40% of the entire Australian

population), which leverages Woolworths' existing scale in supermarket retailing. To broaden

this capability, Woolworths made a 50% investment in Quantium (a specialist data research

company). The acquisition of Cellarmasters and Ezibuy by Woolworths brought separate data and systems capabilities.

Market share opportunity: It would be likely that Woolworths would increase market share

within the scope of its existing business as a result of reducing its cost relative to its main

competitors – market share moving inversely with a change in relative cost position. In FY14,

supermarket retail industry revenue totalled $93bn and Woolworths had a 38% share of that

market. Woolworths has ~33% greater scale than Coles in Supermarkets and has an

economic 'technology' advantage due to differences in its supply chain and the location of some of its stores. We estimate that relative scale results in ~120bp cost advantage and

that a productivity/technology advantage (store location, supply chain, systems) delivers

130bp of cost advantage. Reducing distribution centre labour and extending the scale

advantage by another 10% would, other factors equal, likely create an additional 40bp of

cost advantage. As well as extending a relative scale advantage to Coles, industry

concentration would be likely to increase.

Distribution

Store

Current DCs

Cost of operation

Limited range

Limited customisation

Limited channel support

Current stores

Homogenous size and range

High cost to extend range

Customer

Customer requirements

Don’t fully capture food value – premium/value, cuisine opportunities

Don’t capture potential non-

food opportunities

Online delivery from store

Limited range to customer

High cost to increase scale

1

2

3

4

Distribution

5Non-food distribution

Don’t leverage food scale

Food Non-Food

IDEAS ENGINE 10

Woolworths (WOW.AX)

Figure 20: Woolworths and Coles supermarket scale curves


The opportunities for supply chain modernisation are several fold (it is not the intention of this paper to provide a technical blue print). Consider:

■ Improving distribution of imported goods. Australia imports approximately $11bn of

finished food products annually, which at retail pricing accounts for some 15% of

food retail sales. A very high proportion of non-food product is imported. In most

areas of the imported goods supply chain there is multiple handling and consolidation

/ deconsolidation of product by suppliers and Woolworths.

■ Distribution centre enlargement and automation. Woolworths' distribution centres were designed and built in the early 2000s for the store network planned at the time

and have some level of automation of stock put away and retrieval. The store network

is now larger, there are additional demands for online fulfilment, product requirements

have changed and volume has increased to a level where further automation would

improve productivity.

■ Integration and leveraging scale across food and non-food. The supermarket distribution capability was developed ahead of liquor and non-food and there has been

little integration between those distribution networks and systems.

Figure 21: Change in relative scale and EBIT margin between 2000 and 2014

Source: Company data, Credit Suisse estimates. * Relative scale is the ratio of Woolworths food & liquor sales

revenue to Coles food and liquor sales revenue. CR2 is the sum of Woolworths and Coles food and liquor market

shares.

Premium and value market segments: Woolworths provides a 'mid-market' supermarket

offer. Woolworths has a 38% share of food retail which is concentrated heavily in the mid-

market. Its offer does not stretch significantly into the premium and deep value segments of

the market. The more obvious manifestation of this is the absence of customisation of stores

according to location – Woolworths' store fit out and range is very similar irrespective of

store location. That uniformity creates efficiency, but provides a less compelling customer

proposition in markets vis a vis local competitors. Woolworths has started some customisation in recent years to introduce certain premium fresh products. The challenge for

Woolworths would be to customise and retain the advantages of scale. Some sense of the

opportunity can be seen from an analysis of expenditure on food by income quintile.

Woolworths' position in the lowest income quintile is likely to be relatively low, as evidenced

by the growth of Aldi in the Australian market (value segment). Woolworths' position in the

upper income quintile would also be low, as evidenced by the relatively stronger position of

fresh specialty retailers in upper income locations. There are also other dimensions of customisation across cuisine and ethnic dimensions driven by ongoing migration into

Australia.

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Relative scale 1.1 CR2 0.56 Relative scale 1.4 CR2 0.63

Relative EBIT margin

2000

2014

Woolworths relative to Coles EBIT margin

IDEAS ENGINE 11

Woolworths (WOW.AX)

Figure 22: Food expenditure by income quintile ($/household / week)


Figure 23: Australian population by place of birth

Source: Australian Bureau of Statistics

Online ordering and direct to customer delivery: The online channel for food is

currently small relative to the total food and liquor retail market. From the current ~2% of total sales, it has the potential for significant growth.

Online is not universally profitable. The UK supermarket industry has had profitability

challenges in online. There are several factors supporting the likely profitability of the online channel for Woolworths in Australia – the high concentration of the Australian supermarket

industry which is supportive of profitability, the significant scale advantages in marketing,

purchasing and supply chain enjoyed by Woolworths and Coles, which create significant

barriers to entry for new entrants seeking to only compete in delivery and the ability of

Woolworths and Coles to utilise their store networks for order online and pick up from store

options.

The order online and pickup from store opportunity is likely to be a particular advantage for

Woolworths. Woolworths has the opportunity to integrate fulfilment capability to enable a

broader range of existing store infrastructure to be used for pick up locations. Woolworths

has ~3,000 supermarket, liquor and convenience stores nationally, all of which are potential

pick up locations.

We estimate delivery cost to be in the order of $20-30 per basket. Delivery cost versus order size is shown in the graph below. At average supermarket gross margin, delivery of an

order breaks even at an order size of ~$80 and generates similar profitability to store based

fulfilment at an order size of ~$150.

Figure 24: Delivery cost versus order size


0

50

100

150

200

250

Lowest Second Third Fourth Highest

Meat, seafood, fruit and vegetables Alcoholic beverages

Packaged food and beverages

0

50

100

150

200

250

300

350

Lowest Second Third Fourth Highest

Meals out and takeaway food Meals at home

0

2,00,000

4,00,000

6,00,000

8,00,000

10,00,000

12,00,000

14,00,000

16,00,000

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Africa & Middle-east East Asia South & Central Asia

8% of Aus population

14% of Aus population

0%

10%

20%

30%

40%

50 100 150 200 250 300

Order size ($)

Store cost

Online fulfilment

Average food GM

IDEAS ENGINE 12

Woolworths (WOW.AX)

Figure 25: Supermarket and variety store online share of total sales


New customer segments: There is a potential customisation opportunity within B2B

markets. A large category of food expenditure occurs in what is traditionally defined as the food service market. The opportunity for Woolworths would lie in both substituting consumer

expenditure at the margin between prepare at home and prepare out of home food decisions

and directly supplying the food service market. Consumer expenditure on food outside of

supermarkets is 50% the size of the currently defined supermarket industry. The success of

Costco and apparent over indexing of food in this market, potentially illustrates a level of

under-servicing.

The constraints for Woolworths on substituting consumer buying from food service to eat at home at the margin is largely to do with the efficient supply of an enlarged product range.

Store customisation would be likely to assist with switching that purchasing.

B2B for food service is probably a stretch in the near term and higher risk due to differences

in that market. It would be likely that any opportunity for Woolworths to penetrate that

market segment would be through a delivery service rather than a store based service.

A sustainable position would require a reasonable level of synergy derived from product sourcing and fulfilment. That synergy is one that has been achieved by large format stores

such as Costco for subsets of the business and consumer markets.

Figure 26: Australian consumer food expenditure


Supply chain development is likely to enable Woolworths to leverage a scale advantage

in food into non-food

To date, Woolworths' strong position in food retail has not been a material factor in building competitive advantage in non-food. That situation appears to have arisen because of

constraints on cost effectively presenting and supplying a broader range of non-food

products in supermarkets. Supply chain and data development have the potential to increase

synergy between Woolworths' food and non-food retail activities – for example, to increase

the available product range, customise range by store, synergistically market food and non-

food products online and leverage the cost of delivery across food and non-food products.

The potential prize is considerable. Consumer expenditure on non-food products, excluding bulky goods, was $75bn in FY14. If only 5% of that expenditure were switchable the market

opportunity would be $4bn.

2.1% 2.4%

4.2%

5.0%

5.7%

8.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Walmart Woolworths Sainsbury UK industry Tesco Marks & Spencer

93.1

8.7

15.1

22.7 Australian food retailing ~$140bn

Supermarket and grocery stores

Specialty Food retailing

Takeaway food services

Cafes, Restaurants

IDEAS ENGINE 13

Woolworths (WOW.AX)

Figure 27: Consumer expenditure on food and non-food (ex bulky goods) product


From a competitive and prospective profitability perspective, Woolworths is more likely to be able to transfer scale advantages from food into non-food, than general merchandise retailer

moving in the other direction. The scale curve in food retail is very steep and the technical

requirements for efficient supply chain and fulfilment in food are high (marketing other

rebates for a large scale national supermarket retailer can be 10% of sales). It is unlikely

that a general merchandise competitor could create sufficient scale in grocery purchasing

and supply chain to profitably cross sell from general merchandise into grocery. There is no

prospective general merchandise entrant into grocery in the Australian market.

The opportunity for Woolworths to transfer scale in food to non-food is high. In many general

merchandise categories, Woolworths already has scale through its supermarkets, Big W and

increasingly with Ezibuy. Hence differences in purchasing scale between Woolworths and

general merchandise competitors are unlikely to create a material cost disadvantage in non-

food and in some categories Woolworths is likely to be relatively larger. Assuming a similar

starting base from a cost of goods perspective, synergy would arise through online and pick up from store fulfilment. Profitability for an order with a 20% non-food mix and fulfilled direct

to customer is illustrated in the chart below.

Figure 28: Food and non-food cross sell profitability


In totality, a larger opportunity leveraging from the core

We summarise the scope of opportunity diagrammatically below, highlighting scope for

market share expansion within the existing food retail market, expansion along a product

axis into non-food and expansion along a customer axis into B2B.

Figure 29: Woolworths scope for expansion around the core


93.1

77.5 Adderssable non-food market ~$75bn

Supermarket and grocery stores

Non-food retail excluding bulky goods

0%

10%

20%

30%

40%

50 100 150 200 250 300

Order size ($)

Store cost

Online fulfilment

Average food GM

Move down scale curve witrh

GM with 25% non-food mix

Price / value

position

Specialist

Product


Customer

segment

B2B

Woolworths

Premium

Discount

Market

$75bn

Market

$30bn

Generalist

IDEAS ENGINE 14

Woolworths (WOW.AX)

Value implications

Woolworths is likely to enter a period of increasing supermarket oriented capital

expenditure

It is likely that there will be an increased level of capital expenditure into food and liquor

related expansion opportunities in the next several years, partly offset by a lowering of the level of capital expenditure into Home Improvement (which has already been flagged).

Capital is likely to be directed in FY15 and FY16 towards normalising the rate of

supermarket refurbishments, which fell in the last several years, and towards increasing the

amount of investment into the supply chain capabilities discussed in previous sections. In

relation to supply chain we hypothesise circa $1bn of capital expenditure over three years to

replace and introduce a new level of automation into several existing distribution centres. The estimates are based on circa $200mn each for replacement / modernisation of five

major distribution centres.

The domestic distribution network is aged and constrained. Woolworths currently has

National Distribution Centres for slow moving lines in Sydney (opened 2001) and Melbourne

(opened 1998) and a network of regional and specialist distribution centres. In Sydney, the

Minchinbury regional distribution centre (opened in 1998 and extended in 2006) is constrained on space; a second regional distribution centre at Wyong was opened in 2005.

In Victoria, produce is located in Mulgrave (alongside the NDC) and a regional distribution

centre is located in Wodonga (opened 1998 and extended 2006). Fresh and frozen is part

insourced and part outsourced (Americold - Vic, Western Australia, Queensland).

Woolworths has a sourcing infrastructure in Hong Kong. Flow of goods to Australia is

relatively unsophisticated in terms of consolidation and optimisation to location.

Figure 30: Expect acceleration in refurbishment activity in the next several years


Our estimates of capital expenditure and its allocation are shown in the figures below.

Estimates show refurbishment related capital expenditure normalising at 70% of D&A (consistent with an 8-year supermarket refurbishment cycled) and an increase in supply

chain related capital expenditure. Through the period FY16 to FY18 our estimates include

$1bn of project related supply chain capital expenditure (in additional to stay in business

capex).

0%

20%

40%

60%

80%

100%

120%

140%

0%

5%

10%

15%

20%

25%

30%

FY03A FY05A FY07A FY09A FY11A FY13A FY15F FY17F FY19F

% supermarkets refurbished Refurb cap ex % D&A (RHS)

IDEAS ENGINE 15

Woolworths (WOW.AX)

Figure 31: Supply chain capital expenditure to increase between FY16 and FY18


We apply conservative return projections and highlight likely outcomes

Potential market opportunities are summarised in the table below. Expanding market share

from advancing a technology and scale advantage in the existing supermarket industry is

likely to have the lowest risk of achievement, followed by extension of scale to non-food and

to B2B. The market assumptions are reasonably conservative.

Figure 32: The market opportunity


We have used scenarios on mid and high cases for return on supply chain investment. The

mid case (which is the basis for our forecasts) delivers a return below the existing ROFE for the supermarkets division. Note that the return estimates include the impact of inflation on

earnings.

Figure 33: Investment return assumptions (FY19 EBITDA improvement % investment)

Source: Company data, Credit Suisse estimates. Cash ROFE = EBITDA divided by Funds Employed

The impact on earnings, summarised as CAGR EBIT between FY14 and FY19, is summarised in the table below. The scenarios produce EBIT outcomes from 6.3% (industry

growth) to 10.5% - the upper end of the market and CODB assumptions. The outcomes

modelled are conservative relative to those achieved during Project Refresh, primarily in

relation to potential margin expansion.

Figure 34: EBIT CAGR FY14-19


The track record on food and liquor related capital expenditure is strong

Woolworths was able to drive an expansion in invested capital and improved ROIC through to

FY10. Between FY10 and FY14 there was an improving relative cost position from its major

competitor Coles, and Woolworths was able to stabilise ROIC at a high level and continue to grow invested capital at a reasonably healthy 5%

An improvement in ROIC was particularly pronounced during a period of low inflation from

FY10 through to FY14.

0

500

1,000

1,500

2,000

2,500

3,000


New stores Refurbishment Stay in business and supply chain Home improvement Property

Market opportunity Driver Risk

Food retail market share Relative cost and online 2ppt share 1.9 5ppt share 4.7 Low

Non-food retail market share Food to non-food synergy 2ppt share 1.5 5ppt share 3.8 Medium

Food service distribution B2C to B2B synergy 10ppt share 1.3 20ppt share 2.5 High

4.6 10.9

Growth on AF&L FY14 sales 11.2% 26.6%

CAGR (assuming 10-year delivery) 1.1% 2.4%

Opportunity ($bn)

Low High

0%

20%

40%

60%

80%

100%

Mid High

Cash ROFE FY14


CODB 0ppt 1ppt 2ppt

0 6.50% 7.50% 8.40%

-60bp 8.00% 9.00% 9.90%

-90bp 8.70% 9.70% 10.70%

Project Refresh outcomes

FY00-FY08

Sales CAGR 9%

EBIT CAGR 17%

EBIT margin change 277bp

IDEAS ENGINE 16

Woolworths (WOW.AX)

Our mid-point projection results in a fall in ROIC from AF&L due to a higher level of capital

expenditure. ROIC begins to improve off a high level of invested capital from FY18 onwards due to acceleration in sales growth and lower of cost of doing business resulting from the

investment program. Invested capital grows at 7-8% though FY16 and FY17 and then

growth normalises towards 5% from FY19. Our forecasts allow for a 20bp increase in

CODB in FY16 due to implementation related activities.

Figure 35: Woolworths ROIC*

Source: Company data, Credit Suisse estimates. * ROIC based on operating leases capitalised at 12x lease

expense and 30% tax rate. AF&L calculation is ungeared.

At an operational level, it would be likely that sales growth would be reflected in an apparent

increase in productivity from existing selling space – largely resulting from the growth of

delivery and pick up from store channels.

Figure 36: Australian Food & Liquor stabilising sales productivity


Earnings growth at a group level is driven by stronger growth from the AF&L division.

Figure 37: Accelerating earnings growth driven by Australian Food & Liquor Division


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%


Invested capital (RHS, yoy%) ROIC ROIC - ex Masters ROIC - AF&L

ROIC improvement during Project Refresh

NZacquisition

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%


AF&L sales per sqm yoy% Aus Food CPI AF&L trading area growth (RHS yoy%)

Marketing issues Period of risk

Stabilisation & improvement

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


EBIT growth AF&L Division EPS growth

IDEAS ENGINE 17

Woolworths (WOW.AX)

Free cash flow improves over the forecast horizon (ex property acquisition / divestment).

Note that our forecasts do not include any property acquisition as part of a supply chain redevelopment as past behaviour would suggest that Woolworths would onsell property

under long-term sale and leaseback. The effect of that assumption is a regearing of the

balance sheet and a larger than otherwise increase in free cash flow.

Figure 38: WOW free cash flow and FCF yield


Figure 39: WOW debt metrics remain strong through the investment phase


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0

400

800

1200

1600

2000

2400

2800

3200

3600

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

WOW free cash flow $mn WOW free cash flow yield (RHS)

CS forecasts

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


Net debt to EBITDA (RHS) Fixed charges cover (LHS)

IDEAS ENGINE 18

Woolworths (WOW.AX)

Expansion strategies have a higher value than the

market is pricing

Current share price is capitalising start-up losses

There appears to be an overly pessimistic view of the impact of repositioning Big W and

start-up losses from and Home Improvement.

There is short-term cost in the General Merchandise result due to the repositioning of Big-

W's product range. The discount department store has been through periods of trough

profits before and capitalising the current rate underestimates the value of the business.

It is uncertain when/if Masters will generate a profit. However, capitalising the current rate

of losses significantly understates the likely realisable value of Masters, even if it is assumed

that the venture makes no material profit for Woolworths. First, the venture is property rich, which results in a positive realisable value. Second, the venture would provide an established

large store base for another potential competitor in the home improvement industry.

Figure 40: Woolworths P/E with and without start-up losses


Figure 41: Woolworths P/E premium to market


A substantial supply chain investment is likely to improve WOW's PE

WOW's P/E improved significantly through the course of Project Refresh – the key was the demonstration of falling cost and accelerating like for like sales growth. Historically, there

has been a good correlation between like-for-like sales growth and market P/E.

Will the same outcome be achieved in the next stage of supply chain? The initial response

will naturally depend on how well the message is communicated, the size and likely timing of

payback on investment. An increase in capital expenditure for FY15 wasn't particularly well

communicated and seemed to be interpreted by the market as largely 'sustaining' capital

expenditure. Success with the previous supply chain initiative improves the likelihood of a favourable market reaction to a major supply chain oriented project. WOW has been

preceding with a number of initiatives (the first 'dark store' for online opened during 2014)

and the implementation of integrated food and non-food systems ahead of a large scale

supply chain announcement. Hence, there is a prospect of some early wins at the time of a

major investment announcement

8.0x

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

15.0x

16.0x

17.0x

18.0x

19.0x

20.0x

Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14

ASX100 price-earnings forward Woolworths Woolworths PE excluding Home Improvement

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14

WOW PE premium to ASX100

IDEAS ENGINE 19

Woolworths (WOW.AX)

Figure 42: Woolworths P/E and AF&L same store sales growth


Relative value improves significantly in outer years

CS forecasts for WOW show a market multiple in the outer years of the forecast, consistent

with share price upside.

Figure 43: Woolworths P/E vs ASX 200

ASX200 Price-earnings (consensus)

Woolworths Price-earnings (CS forecast) WOW premium

2015 14.4x 16.7x 16%

2016 13.3x 15.6x 17%

2017 12.4x 13.9x 12%

2018 11.3x 12.7x 12%

2019 11.2x 11.2x 0%


Valuation is supportive

The DCF valuation scenarios provide strong valuation support for WOW. Under the mid point

assumption (which is the basis for our forecasts), DCF is $42.60. The 'High' case for sales and CODB savings generates a DCF of $44.18 per share. The DCF valuations are based

on WACC of 8.4% and terminal growth rate of 1.5%.

Figure 44: DCF valuation


Figure 45: Upside in DCF versus current share price


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019



CS forecasts


CODB 0ppt 1ppt 2ppt

0 40.92 42.35 43.81

-60bp 41.15 42.60 44.06

-90bp 41.27 42.70 44.18


CODB 0ppt 1ppt 2ppt

0 18% 22% 26%

-60bp 18% 22% 27%

-90bp 19% 23% 27%

IDEAS ENGINE 20

Woolworths (WOW.AX)

Figure 46: DCF valuation 'mid' sales and CODB saving scenario

Valuation summary

EBIT growth (CAGR)

Years 1 to 5 8.9%

Years 5 to 10 1.5%

ROIC

FY14A 10.0%

FY19F 10.5%

FY24F 9.7%

DCF

WACC 8.4%

Terminal growth 1.5%

Enterprise Value ($mn) 55,352 14.1x FY15 EBIT

DCF Value ($/share) 42.60 20.5x FY15 EPS

Sensitivities

WACC +1.0% 3.25

Gross margin +1.0% 1.95

LFL sales growth +1.0% 4.70

CS FY15F metrics

Dividend yield 4.1%

Price-earnings ratio 16.8x

FCCR 3.0x


IDEAS ENGINE 21

Woolworths (WOW.AX)

Appendix

Figure 47: Australian supermarket industry sales growth (chain LFLs)

Source: Australian Bureau of Statistics, Company data, Credit Suisse estimates

Figure 48: Supermarket price inflation


Figure 49: Supermarket selling space sqm and growth (RHS)


Figure 50: Supermarket EBIT comparison $mn


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14

Smkt & liquor stores Coles F&L LFL WOW AF&L LFL

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14

Coles food inflation WOW average price

CPI - food and non-alc. bev. CPI - food and non-alc. bev. Ex produce

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

13,00,000

14,00,000

15,00,000

16,00,000

17,00,000

18,00,000

19,00,000

20,00,000

21,00,000

22,00,000

23,00,000

2009Q4 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4

WES Coles WOW AF&L WOW growth (RHS) WES growth (RHS)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15F

Woolworths Coles

IDEAS ENGINE 22

Woolworths (WOW.AX)

Figure 51: Industry market share $bn


Figure 52: Industry market share change


Figure 53: Global supermarkets—past three-year CFROI


Figure 54: WOW—P/E and AF&L same store sales growth


0

20

40

60

80

100

120

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

WOW Australian Food & Liquor WES Coles FoodlandDairy Farm Franklins Pick n Pay Franklins AldiFoodworks / AUR Major IGA chains Other supermarkets

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2004 2006 2008 2010 2012 2014

WOW Australian Food & Liquor WES Coles Aldi Independents

Gaining share

Losing share

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Americas Europe

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019



CS forecasts

IDEAS ENGINE 23

Woolworths (WOW.AX)

Companies Mentioned (Price as of 22-Sep-2014)

Ahold (AHLN.AS, €13.085) Carrefour (CARR.PA, €25.705) Casino Guichard (CASP.PA, €90.38) Costco Wholesale Corporation (COST.OQ, $125.83) Delhi Bank (DWNX.PK, $27.0) George Weston Limited (WN.TO, C$89.49) Groupe Delhaize (DEG.N, $17.34) Kroger Co. (KR.N, $52.03) Metcash (MTS.AX, A$2.71) Morrison (William) (MRW.L, 179.0p) SUPERVALU INC. (SVU.N, $9.19) Safeway Inc. (SWY.N, $34.22) Sainsbury (SBRY.L, 278.8p) Target Corporation (TGT.N, $63.36) Tesco (TSCO.L, 203.0p) Walmex (WALMEXV.MX, $34.39) Wesfarmers (WES.AX, A$42.65) Whole Foods Market (WFM.OQ, $38.8) Woolworths (WOW.AX, A$34.8, OUTPERFORM, TP A$42.6)

Disclosure Appendix

Important Global Disclosures

I, Grant Saligari, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Casino Guichard (CASP.PA)

CASP.PA Closing Price Target Price

Date (€) (€) Rating

25-Oct-11 64.03 72.00 O

18-Apr-12 72.88 82.00

30-Jul-12 69.05 78.00

18-Jan-13 72.70 83.00

20-Dec-13 83.00 NR

14-May-14 90.05 R

30-Jun-14 96.83 NR

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N O T RA T ED

REST RICT ED

IDEAS ENGINE 24

Woolworths (WOW.AX)

3-Year Price and Rating History for Wesfarmers (WES.AX)

WES.AX Closing Price Target Price

Date (A$) (A$) Rating

14-Oct-11 31.60 33.96 O

20-Oct-11 31.50 32.76 N

16-Feb-12 29.05 30.41

26-Jul-12 32.21 31.21 U

16-Aug-12 33.68 31.46

30-Jan-13 38.08 32.71

14-Feb-13 38.83 35.45

18-Apr-13 42.17 35.53

17-May-13 42.87 35.68

15-Aug-13 41.21 37.45

12-Sep-13 41.37 45.94 O

24-Oct-13 41.87 45.90

23-Jan-14 43.08 44.90 N

29-Apr-14 42.92 44.40

20-Aug-14 45.56 45.15 U


O U T PERFO RM

N EU T RA L

U N D ERPERFO RM

3-Year Price and Rating History for Woolworths (WOW.AX)

WOW.AX Closing Price Target Price

Date (A$) (A$) Rating

14-Oct-11 24.78 28.64 N

02-Nov-11 23.67 25.80

21-Feb-12 25.61 26.01 U

01-Mar-12 25.60 25.25

20-Apr-12 26.19 25.20

24-Aug-12 29.35 25.70

12-Nov-12 28.97 25.60

06-Dec-12 29.31 25.45

28-Feb-13 34.93 29.25

23-May-13 33.97 29.85

28-Aug-13 34.59 31.85

31-Oct-13 34.90 36.30 N

23-Jan-14 33.86 38.25 O

14-Jul-14 36.21 38.25 N

29-Aug-14 36.16 39.00


N EU T RA L

U N D ERPERFO RM

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

IDEAS ENGINE 25

Woolworths (WOW.AX)

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector , with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant countr y or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10 -15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant secto r. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 44% (55% banking clients)

Neutral/Hold* 40% (50% banking clients)

Underperform/Sell* 14% (43% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy o r sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

IDEAS ENGINE 26

Woolworths (WOW.AX)

Price Target: (12 months) for Woolworths (WOW.AX)

Method: We have a target price of $42.60 per share for Woolworths. This is based on our DCF (discounted cash flow) valuation of $42.60 per share (WACC [weighted average cost of capital] of 8.4%, terminal

growth 1.5%).

Risk: There is risk to our target price of $42.60 for Woolworths from change in the supermarket trading performance and from Woolworth's entry into the home improvement market. Woolworths is also set to embark on a

period of supply chain investment

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (WOW.AX, CASP.PA) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (WOW.AX, CASP.PA) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (WOW.AX, CASP.PA) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (WOW.AX, WES.AX, CASP.PA) within the next 3 months.

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (CASP.PA).

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (WOW.AX, WES.AX, CASP.PA) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

The following disclosed European company/ies have estimates that comply with IFRS: (CASP.PA).

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Equities (Australia) Limited ............................................................................................................... Grant Saligari ; James O'Brien

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

IDEAS ENGINE 27

Woolworths (WOW.AX)

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