Woolworths bets on sobering up when it quits hotels, pokies and booze

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It’s kind of strange that Woolworths refuses to highlight the massive leg up it will receive in its Environmental Social Governance (ESG) credentials as a result of spinning off its liquor and hotels businesses.

Maybe it’s because some of its large investors were agitating for the company to get rid of pubs ( which they reasoned detracted from its wholesome image) and Woolworths didn’t want to appear to be acquiescing to their pressure. Or it’s because Woolworths plans to retain a 15 per cent stake in the demerged drinks/hotels business, Endeavour Group, so it won’t be ESG pristine.

Woolworths will soon farewell Dan Murphy’s.

Regardless of whether it’s by design or accident, the fact is that Woolworths can claim to be putting the ‘S’ into its ESG bona fides. The company already, and understandably, trades on the virtue of its sustainability credentials, including a commitment to get to 100 per cent renewable energy by 2025 and become net carbon positive by 2050.

It has been a few years since Woolworths originally announced it would separate the drinks and hotels assets via a demerger. The company got all the groundwork done before hitting the pause button a year ago as COVID-19 uncertainty intervened.

But Woolworths has always argued the move was driven by strategic reasons rather than a desire to jettison the less ethical and social assets in its portfolio.

It said that the bottle shop assets had traditionally played second fiddle to the larger supermarket division when it came to capital allocation, so once separated they could be capital-nurtured.

Additionally, Woolworths says that separating liquor and hotels would allow investors to make a choice – food or booze and pokies.

Becoming more investable

But there is no denying the fact that large investors continue to sharpen their focus on ESG – and over the past couple of years this trend has accelerated. Without these businesses, Woolworths will become more investable.

There is an increasing number of funds who are unable to invest in companies with assets in, for example, tobacco, gaming alcohol or fossil fuels.

Sans the Endeavour Group, Woolworths would be a company with a core supermarket business and some food-related activities such as its investment in kit meal business Marley Spoon and food distribution business PFD. Its discount department store Big W sits rather awkwardly alongside.

Woolworths has always argued the move was driven by strategic reasons rather than a desire to jettison the less ethical and social assets in its portfolio.

Woolworths’ elevator pitch is ‘building food and everyday needs’.

Ultimately the company probably subscribes to the same rationale that has prompted many demergers – the theory that the sum of the parts is greater than the whole.

Mixed earnings bag

On Wednesday, Woolworths released its half-year results to December – which will be the last set of audited results investors will see before the demerger set for June.

The Endeavour Group produced a COVID-affected mixed earnings bag. Endeavour Drinks – the bottle shop business that includes Dan Murphy’s and BWS was booming thanks to consumers drinking from home, rather than in pubs and restaurants. Sales grew by 19 per cent and earnings before interest and tax raced ahead 24 per cent. In keeping with trends experienced across many sectors, online sales grew more than 50 per cent.

The flip side is that sales at its hotels business fell by 27 per cent and earnings almost halved from the same period last year. But given the gradual easing of COVID restrictions, the hotels division improved in the six months to December compared with the first half of the 2020 calendar year.

As expected, Woolworths’ Australian food segment (which is dominated by supermarkets) had a strong half to December with sales up 10.6 per cent and earnings up 13 per cent.

Even the historically earnings-challenged BigW chain staged a remarkable comeback, with sales up 20 per cent and earnings soaring 166 per cent. No, that’s not a typo.

Like Woolworths’ liquor and food divisions, Big W was a COVID beneficiary. Its discount department store chain was turbo-charged by government stimulus money and consumers’ inability to spend on travel.

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