I find your post rather alarmist and not overly based on discernable facts.
Some thoughts as follows;
"Can tell you from personal experience having dealt with Woolworths HO that they have millions of dollars worth of dead stock in all channels. The only way they will clear it is through writing it off."
This above sentence is quite mischeavious IMO. The claim it contains is not quantified and likely very immaterial to the overall scale of WOW's business. For a predominantly retail business that turns over 50 billion+ pa 'millions of dollars' worth of dead stock at a particular point in time is a commercial reality.
"Their Big W and Dick Smith channels are bleeding money too."
One aspect of your post that i would agree with is that Dick Smith is currently a challenged business - being at the highly competitive discretionary end of retailing, in an environment with consumers largely on strike. However in the context of WOW's overall business DS is hardly material and is certainly not 'bleeding money'.
Dick Smith contributed less than 3.5% of Revenue to WOW's group result FY10. While the EBIT margins have declined at an alarming rate over the last 5 FY's (as below) the EBIT margin of the last HY increased on the PCP, which combined with sales growth in the new store foremats possibly indicates that the recent changes are a step in the right direction. Still I agree Consumer Electronics is a challenged business pod.
I do however disagree with your assesment of Big W. While again it is trading in a challenged environment of low consumer spending and price deflation due to the high AUD, it is no where in the league of DS on the list of challenges facing senior management.
Whilst revenue over the last year in BIG W has fallen slightly( which is also true of Target .9% decline FY09-10 same store sales), margins have generally held and actually expanded over a 5 year period.
Over the same 5 year period Big W has achieved revenue growth of 6% CAGR, and EBIT growth of 10% CAGR. It does not have the high margins of Target but operates on a similar EBIT margin as Kmart.
Positives in the last quarterly sales report were foot traffic and basket size increase. No reason not to expect further store roll out (up to 20 over the next 3 years) as well as further margin expansion - definitely not a dog of a business IMO.
Probabnly where i would disagree the most with your opinion is regarding WOW's entrance into the home improvement market. Home improvement in Australia from a large retailers perspective is certainly not a 'saturated market' with Bunnings controlling around 19% market share and Mitre 10 4%. Two thirds of the market is supplied by smaller fragmented retailers - I would say its ripe for consolidation.
I can't think of a retail sector that would be better for WOW to weigh into with its retailing nous.
Looking at Bunnings as an example, they have expanded at an impressive rate (22 new stores in 2010, including 11 new Bunnings Warehouses) running at revenue and EBIT growth of around 10% pa, whilst steadily expanding margins. WES are achieveing outstanding EBIT margins in home improvement, expected to rise to 11.5% sales this current half year.
Bunnings needs competition IMO. I foresee Masters achieving a 3-4% market share by 2015, without engaging in Market discounting against Bunnings.
As always the victims will be the smaller independent retailers as the Big Boys weigh in and consolidate market share.
WOW remains a class act IMO, they can generate FCF at low single digit growth into perpetuity. I see no reason not to expect earnings growth and margin expansion across the group.
WOW Price at posting:
$27.78 Sentiment: LT Buy Disclosure: Held
(20min delay)