Woolworths (ASX: WOW) is undergoing a pivot of its own from liquor retail and hotels to pet goods via a potential ~50% stake in PETstock, according to Bloomberg and the Australian Financial Review.
To fund that transition, the supermarket giant sold an outsized 5.5% stake in Endeavour Group (ASX: EDV) via a block trade at a price of $6.46 per share worth $636 million on Tuesday.
Following the sale, Woolworths will retain a 9.1% interest and expressed no intention of further reducing its stake in the short to medium-term.
Consequently, Endeavour shares slumped -2.8% on Tuesday and another -3.9% in early trade on Wednesday.
Goldman Sachs said the transition from liquor retail and gaming/hotels into pet retail is in-line with the company's strategy of "building a retail ecosystem."
"A PETstock acquisition would have the potential to generate synergies, bringing scale to Woolworth’s existing investment in ~58% of Pet Culture (independently operated online petcare retailer) and its vision to expand everyday care categories," the investment bank said in a note on Wednesday.
From a strategic perspective, the outlook for the petcare sector appeared attractive relative to alcohol retail. The analysts noted:
Declining birth rates in Australia (1.70 in 2021 vs. 1.92 in 2011)
Higher growth in petcare (~5% CAGR 2017-2022 to ~5% 2022-2027)
Slowing growth in alcohol retail (~7% CAGR 2017-2022 to 4% 2022-2027e)
"... if the acquisition does materialize, it could serve as a growth lever to build a new sizeable growth platform for Woolworths," the analysts said.
The note reaffirmed a Buy rating for Woolworths shares with a $41.70 target price.
It's been a one step forward and one step back kind of year for Endeavour shares. The stock rallied 24.6% year-to-date through to 19 August and has since given back all those gains, down -5.3% year-to-date.
Goldman Sachs said it expects the selldown to "generate short-term share price pressure and also comes at a time when retail growth (Dan's and BWS) is likely to be muted given high prior year comps."
Still, the investment bank expects a strong Christmas trading period as hotel revenue returns back above pre-Covid levels. There was also the expectation that the implementation of tighter gaming regulations will take longer-than-expected due to the highly fragmented nature of Australia's ~7,500 pubs.
After the dip to a 10-month low of $6.70, Goldman views this price point as "already largely factoring in gaming regulation risk and is an attractive entry point to a high quality Australian retailer."
Goldman was Buy rated on Endeavour shares with a $8.10 target price.
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