Woolworths: One More Thing
You’ve already heard enough about the Woolworths misadventures in recent times, but I couldn’t resist mentioning one recurring feature of their recent disclosures: “Investment in prices.” The most recent announcement makes reference to this investment four times in the first two pages.
Investment is what good companies do, of course. It implies a certain sacrifice today for greater longer-term good. Value investors know that allocating capital wisely to investments is one of the keys to long term value growth.
But what exactly is an investment in lower prices?
Normally, investment shows up in the “Cash Flows from Investing Activities” section of the cash flow statement, and finds its way into the balance sheet, under “Assets”.
As I understand it, the accounting for an investment in prices is different. It shows up simply as lower revenue and profit numbers than there might have otherwise have been. Because of this, it can be hard to clearly distinguish investment in prices, from more worrisome financial developments, like prices declining as a result of tougher price competition.
This is not a criticism of management. I genuinely think management is doing what needs to be done. However, I can’t help feel that Investor Relations may be trying a little too hard to sugar coat reality.
Maybe lowering prices can be seen as a legitimate form of investment. If so, we can look forward to some impressive long-term rewards from the gigantic investment in prices currently being undertaken by some of our larger iron ore miners and energy companies.
Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund. To invest with Montgomery domestically and globally, find out more.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
David King
:
A better idea might be to invest in customers. They could start by studying the Aldi business model, make the assumption that Aldi’s expansion plans are going to happen, make the further assumption that Lidl is on its way, study ITS business plan, and then hold a series of emergency board and staff meetings and hope some real brain storming might work before its too late’to make some real changes..
tony
:
I bet Montaka members benefit. Sadly i was late with the paperwork
Phil WASER
:
Yes the investor relations team are drawing a long bow. When a company loses it’s pricing power the moat becomes somewhat compromised and the attraction loses it’s shine…hopefully my investments are those ones that look attractive sitting on my balance sheet…
Random Ash
:
If they’re current prices are already a result of ‘investment in prices’ then they’ve got a lot of ‘investing’ to go.