Woolworths’ disastrous foray into hardware continues to haunt the retail giant after law firm Maurice Blackburn revealed plans for a $100 million class action against Australia’s biggest supermarket chain.
Despite closing the doors on its loss-making Masters Home Improvement business last year, the proposed class action relates to alleged breaches of the Corporations Act dating back to Woolworths’ shock profit downgrade in early 2015 and attempts to stem big losses from its hardware operation.
By late 2014, analysts were reporting Woolworths was putting up margins at the supermarket chain, cutting staffing levels and leaning on suppliers in an attempt to make up burgeoning losses at its failed Masters Home Improvement chain and Big W.
Shopper backlash to price increases and a broader deterioration across the supermarket chain gained momentum between December 2014 and January 2015, eventually forcing the retailer’s management to cut its full-year earnings outlook in February 2015. Woolworths’ shares dived 13.7 per cent in the wake of the profit downgrade.
One analyst said Woolworths eventually confessed to being too focused on meeting short-term earnings targets but the insight came too late to prevent many shoppers abandoning the chain, creating an opening for Wesfarmers’ Coles business to exploit.
“They just kept on trying to meet earnings targets by going back to the milking cow that was the supermarkets business,” one analyst said.
The proposed class action could exceed $100 million, Maurice Blackburn said on Tuesday. It has opened a registration portal for shareholders to sign up to the claim.
While Maurice Blackburn’s investigation continues, the law firm alleged Woolworths knew that it was significantly behind its profit projections as early as October 2014 but continued to maintain its profit guidance until the publication of its half-year accounts in February 2015.
“When corporations don’t abide by the laws requiring they make timely and accurate market disclosures, these aren’t mere technical breaches – it causes loss to shareholders, undermines the integrity of the market and distorts the efficient allocation of capital that could go to more deserving companies,” Maurice Blackburn principal Andrew Watson said.
“The end result is that shareholders, both individual everyday Australians and large institutional investors entrusted with members’ savings such as large superannuation funds, unwittingly suffer the consequences and lose out in a major way.”
Fears the poor performance of Masters was hurting Woolworths’ core supermarket business surfaced after the supermarket chain reported soft first-quarter sales in late 2014, prompting a number of analysts to question whether the retail giant would meet its full-year net profit guidance.
In a research note from December 3, less than a week after Woolworths reaffirmed its full-year guidance, Bank of America Merrill Lynch analyst David Errington slashed the earnings outlook for the retailer by 5 per cent for fiscal 2016 and 13 per cent for fiscal 2017.
Merrill Lynch forecast the 2015 full-year net profit after tax would grow by 4.5 per cent, at the bottom end of the retail giant’s guidance of between 4 and 7 per cent growth.
“The key reason for our earnings downgrade are our view of the continued deterioration of Woolworths’ non-supermarket business, notably Masters and Big W and the reduced ability in our view of Woolworths supermarkets to continue increasing margins,” Mr Errington said.
“In our view, continuing to drive margins higher in Australian supermarkets is seeing a loss in competitive position, leading to deteriorating sales and ultimately a fall in margins.”
Woolworths cut its full-year net profit after tax guidance to the “lower end” of analyst forecasts as part of its half-year results in February 2015.
The retailer’s 2015 full-year net profit before one-off costs inched up by just 0.1 per cent to $2.45 billion, while its full-year net profit slumped 12.5 per cent to $2.15 billion, thanks to big losses at the Masters chain.
IMF Bentham has proposed to fund the class action, which would deal with claims of alleged misleading or deceptive conduct and alleged breaches of continuous disclosure laws between November 27, 2014 and February 26, 2015.
Senior investment manager at IMF Bentham, Wayne Attrill, said like all shareholder class actions, it would proceed only if enough shareholders signed up.
“This is a chance for investors who believe they were deprived of information on the true state of affairs of the company standing up and being able to access a meaningful redress,” Mr Attrill said.
Woolworths on Tuesday said it had not been served with proceedings and would defend any action.
“Woolworths considers that it has, at all times, complied with its continuous disclosure obligations,” the company said in a statement.
The class action follows failed action against Woolworths by the Australian Competition and Consumer Commission.
According to Maurice Blackburn, Woolworths said in its defence to the ACCC proceedings that it had forecast in October 2014 that there would be a variance in its gross profit before freight of $53 million.
The competition watchdog’s case was launched in December 2015 and related to the company’s dealings with suppliers to plug a profit shortfall after discovering a $50 million hole in its books. The Federal Court last year ruled the conduct towards suppliers was not unconscionable.
Australian Shareholders’ Association director Allan Goldin said he would watch the case closely. “If continuous disclosure didn’t happen, then we are obviously very concerned,” he said.
Class actions need seven or more people to run, but their financial viability depends on the size of shareholder losses.
Maurice Blackburn would not say whether any institutional shareholders were behind the action.