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The Woolworths Evolution 

Australia | Dec 20 2022

This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW

Brokers mostly see the upside as Woolworths moves further into active investment via the pet industry.

-Woolworths reduces Endeavour Group interest to purchase Petspiration Group stake
-Woolworths anticipates margin efficiencies can be gained from the acquisition
-The purchase continues Woolworths' goal of becoming a “highly relevant everyday needs retailer” 

By Danielle Austin

A period of capital recycling undertaken by Woolworths Group ((WOW)) has culminated in the retailer purchasing a 55% stake in specialty pet retailer Petspiration Group, at a cost of $586m. The purchase follows a partial sale of the company’s Endeavour Group ((EDV)) interest, which assisted in funding the new purchase, with Woolworths generating $636m from the sale of a 5.5% stake. 

With 21% market share, Petspiration is the number two specialty pet retailer in Australia. Alongside the PETstock network, which comprises 276 storefronts and a service suite of 65 vet clinics and 162 grooming salons, the company owns brands Caribu and Glow. 

A move into the pet industry exposes Woolworths to positive trends across the sector, which has benefited from an increase in pet ownership in recent years through the pandemic. The industry is estimated to be worth $10bn, and expected to grow at an average rate of 5.6% per annum between 2019-2026. 

Petspiration generated revenue of $979m in the twelve months to September, and earnings of $158m. The company’s 16.1% earnings margin is almost double Woolworths' 8.3% margin. 

Woolworths anticipates strong growth prospects from its acquisition, and expects its experience and acumen can benefit Petspiration’s value in digital and ecommerce channels, supply chain , retail media, format and network development and advanced analytics. It anticipates this value-add to support sales growth and margin expansion. 

Growth outlook makes increased pet retail exposure sensible move

Brokers largely feel that increasing exposure to the pet retail segment makes sense for Woolworths given the solid growth outlook. Morgans (Hold, target price $34.10) feels the Petspiration acquisition complements Woolworths' existing segment offerings. While the broker found the multiple paid to be high, it believes it will prove more reasonable if the retailer achieves its mid-teen internal rate of return target. 

Describing the capital recycling from Endeavour to Petspiration as a shift from passive to active investment, Citi (Buy, target price $39.50) feels Woolworths is positioned to add value to the Petspiration business. The broker assumes minimal financial impact from the acquisition. 

UBS (Neutral, target price $34.50) similarly sees room for synergies to emerge between the companies, which could in turn improve earnings margins and return on capital. The broker feels Woolworths is evolving through ongoing simplification and the addition of complementary businesses. 

In an opposing view, Ord Minnett (Lighten, target price $31.10) finds Woolworths is becoming an increasingly complex company, with focus shifting away from the core grocery business. Finding the capital recycling fairly neutral from an earnings perspective, Ord Minnett warns the purchase generates high risk of distracting management from core business ahead of a likely challenging year for the grocery industry. 

Outside of daily coverage Goldman Sachs (Buy, target price $41.70) and Jarden (Overweight, target price $35.50) both find the acquisition to be complementary to Woolworths' existing operations, and a positive step for the retailers ecosystem strategy. Jarden highlights almost half of pet purchases are made outside a supermarket environment, meaning the acquisition gives Woolworths exposure to a new, high value customer.

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