In morning trade the Woolworths Group Ltd (ASX: WOW) share price is edging higher.

At the time of writing the conglomerate’s shares are up slightly to $36.75.

Why is the Woolworths share price edging higher?

Investors have been buying Woolworths’ shares this morning after the release of an announcement.

According to the release, Woolworths is planning to develop an automated regional distribution centre and a semi-automated national distribution centre at Moorebank Logistics Park in Sydney.

It expects the construction to be completed by the end of calendar 2023, with initial benefits expected to be realised in FY 2025.

These new facilities will eventually replace the current ambient grocery operations at Woolworths’ Sydney Regional Distribution Centre in Minchinbury, Sydney National Distribution Centre in Yennora, and Melbourne National Distribution Centre in Mulgrave. The current temperature controlled fresh food distribution will continue to be serviced out of the Minchinbury centre.

What will this cost?

This is certainly going to be a big investment for the company. It expects to invest $700 million to $780 million in technology and fitout of the two distribution centres over the next four years and has signed an initial lease term of 20 years with Qube Holdings Limited (ASX: QUB).

Pleasingly, it intends to fund this investment through its existing capital expenditure framework and does not expect it to materially increase its levels of operating capex spend over the period of construction and installation.

All the hard work should be worth it, though. Management expects the centres to deliver a significant reduction in its supply chain costs over time and deliver strong returns above its cost of capital.

Woolworths CEO, Brad Banducci, commented: “Moorebank will transform the way we serve our NSW grocery customers. The new facilities will advance our localised ranging efforts, with the ability to hold over 30% more products than existing facilities. Automation will allow the creation of aisle-specific pallets by store, and in doing so, reduce the time to restock shelves and result in better on-shelf availability for customers.”

“We have learnt a lot from our MSRDC development, which is delivering against its business case and this gives us the confidence that now is the right time to invest in our NSW network,” he added.

The company intends to support team members at sites that will close. And given that it will be a number of years until these closures, it notes that it has the opportunity to explore meaningful redeployment opportunities for impacted employees.

Significant items.

Management has advised that the decision to proceed with the supply chain transformation will result in a one-off pre-tax cost of $176 million. This will be recorded as a significant item in FY 2020.

Which, combined with Endeavour Group transformation costs and employee remediation, brings its pre-tax significant items to $591 million for FY 2020.

Trading update.

In addition to the above, Woolworths has provided a trading update for the 10 weeks ending 14 June 2020.

That update reveals that the company is having a particularly strong finish to the year.

Compared to the prior corresponding period, Australian Food sales are up 8.6%, NZ Food sales are up 15.1%, BIG W sales have jumped 27.8%, and Endeavour Drinks sales are 21.4% higher.

Mr Banducci commented: “Trading has remained strong in Q4 to date, with the exception of Hotels where venues were closed until the end of May and have just begun to enter different stages of reopening. In Australian Food and Endeavour Drinks, sales growth improved in May and June following a more subdued April impacted by unusual trading patterns around Easter and Anzac Day.”

Full year guidance.

In light of this strong finish to the year, Woolworths currently expects to report earnings before interest and tax (EBIT) (post-AASB 16 and before significant items) of $3,200 million to $3,250 million. This compares to $3,290 million in FY 2019 on a 53-week basis.

The main drag on its performance this year has of course been the closure of its Hotels. Hotels EBIT is expected to be $160 million to $170 million, less than half of the $355 million it recorded last year.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Woolworths Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Challenger Ltd (ASX: CGF) share price has returned from its trading halt and sunk lower.

In morning trade the annuities company’s shares are down 7% to $4.93.

Why was the Challenger share price in a trading halt?

Challenger requested a trading halt on Monday while it undertook a $300 million equity raising to further strengthen its capital position and provide flexibility to enhance earnings.

This morning the company revealed that it has successfully completed the institutional component of its equity raising. Challenger raised $270 million through the issue of approximately 55 million new shares at $4.89 per share. This was an 8.1% discount to the company’s last close price.

Management notes that it received significant interest from both domestic and offshore institutional investors, with the placement significantly oversubscribed.

Challenger’s Managing Director and Chief Executive Officer, Richard Howes, was very pleased with the response to the equity raising.

He said: “We are very pleased with the strong support shown by institutional shareholders for Challenger’s commitment to maintaining a strong capital position while at the same time providing flexibility to enhance earnings.”

“This raise supports the business to remain strongly capitalised through this period of ongoing market uncertainty,” he added.

What is Challenger going to do with the money?

Challenger intends to prudently and progressively deploy the capital raised. This will primarily be investment grade fixed income opportunities that provide compelling risk adjusted returns.

Mr Howes explained: “Following the pandemic market sell-off, fixed income asset risk premiums have widened significantly and we are now seeing opportunities, primarily in investment grade, to selectively invest this cash and liquids balance and generate pre-tax ROEs in excess of 20% on the capital backing these investments.”

“This is well above our pre-tax ROE target of the RBA cash rate plus a margin of 14%. Importantly, we can capture these opportunities, while maintaining our current defensive portfolio settings, with a high weighting to investment grade fixed income,” he added.

What now?

Challenger will now push ahead with its share purchase plan which aims to raise up to $30 million.

Existing eligible shareholders have the opportunity to apply for up to $30,000 in new, fully paid Challenger ordinary shares without incurring brokerage or transaction costs.

The issue price will be the lower of the placement price and a 2% discount to the 5-day volume weighted average price of its shares up to, and including, the closing date of the share purchase plan.

No final dividend. 

Finally, also weighing on its shares today has been an update on its final dividend for FY 2020.

Given the uncertain economic conditions, investment market volatility, and its intention to maintain a strong capital position while optimising earnings, the Challenger board revealed that it does not intend to pay a final dividend in September.

More reading

• 5 things to watch on the ASX 200 on Tuesday
• Is the Challenger share price a buy?
• Why Challenger is launching a $300 million equity raising
• 3 long-term ASX 200 shares I’d buy right now
• What are the best ASX shares for dividends?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Afterpay Ltd (ASX: APT) share price currently has a market valuation equal to Santos Ltd (ASX: STO). Whether you think Afterpay is overbought or not depends on whether you think it will grow its earnings to match its valuation. However, from this point, 2 things are pretty clear.

First, it is unlikely to double in price again, let alone another 2 or 3 times. Second, it is clearly the market leader in Australia and possibly the second globally behind the Commonwealth Bank of Australia (ASX: CBA)-backed Klarna app.

Does the Afterpay share price indicate a bubble?

Last week saw most buy now pay later (BNPL) companies valuations rise. The Splitit Ltd (ASX: SPT) share price rocketed up by 110% last week. Meanwhile, the Sezzle Inc (ASX: SZL) share price continued winding its way upward, rising by a massive 30.13% last week. The Afterpay share price rose by only 12.87% by comparison, and Zip Co Ltd (ASX: Z1P) actually fell by 4.5%.

These wild swings are exactly what we saw in the dot-com bubble. There was always a share of the moment that defied gravity to rocket upwards out of nowhere and for no real reason. Followed by others crashing.

But this time it’s different

The dot-com bubble created no real value for the most part. Just wild speculation about what was possible on the internet. Even though the Afterpay share price has inflated so much, BNPL is vastly different. It speaks to 2 separate dynamics in the marketplace today. First, the rise of Gen Z in particular, but also millenials.

These generations eschew credit cards. It pays to remember that the millenials spawned the Financially Independent Retire Early (FIRE) movement. For whatever reason, these 2 generations are extremely financially savvy and appear to have learned a lot from the errors of Gen X, in particular. 

 The second dynamic is the shrinking of discretionary income. For years Australians have seen very low wage growth. At the same time taxes and charges continue to balloon. Moreover, prices for food staples continue to increase, as do house prices. 

Foolish takeaway

The BNPL sector is definitely not a bubble. It is one of the last ways left for most people to acquire discretionary items. The market in Australia, the US and Europe is very large and underserved. 

While the Afterpay share price has risen to a point where it is unlikely to see large scale growth, there are still very good growth opportunities. Personally, I have invested in Sezzle. However, I also like Zip Co as a prospective share purchase. 

More reading

• Should you buy ANZ, CBA, NAB, or Westpac? Here’s what this broker thinks
• How to try and beat the market with ASX shares
• ASIC hits Commonwealth Bank with civil proceedings
• 5 things to watch on the ASX 200 on Tuesday
• Afterpay and 2 more ASX 200 shares to watch this week

Daryl Mather owns shares of Sezzle Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Sezzle Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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