Woolworths earnings report
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Woolworths has delivered its strongest supermarket sales growth in more than two years but chief executive Brad Banducci is reluctant to claim the worst is over for Australia's largest retailer until he sees whether Coles dives into a full-blown price war.
Woolworths spent an estimated $300 million into reducing grocery prices and boosting service in supermarkets in the December half to regain market share from Coles and Aldi, taking its cumulative investment during the past 18 months to $1 billion.
The $1 billion investment reversed an 18-month slide in same-store supermarket sales, but came at the expense of margins and Woolworths' shareholders, who have foregone more than $120 million in dividends.
Woolworths slashed its interim dividend 22 per cent or 10¢ a share to 34¢ – the lowest interim distribution since 2006 – after net profits from continuing operations fell 16.7 per cent to $785.7 million.
![Woolworths chief executive Brad Banducci says the company is comfortable its prices are now competitive with Coles'.](/content/dam/images/g/u/i/6/n/x/image.imgtype.afrArticleInline.620x0.png/1487746549520.jpg)
Woolworths' like-for-like supermarket sales rose 0.7 per cent in the September quarter and 3.1 per cent in the December quarter, the fastest growth since July 2014, outpacing growth at Coles for the first time in more than seven years and adding to fears that Coles will hit back by slashing prices.
The better-than-expected October-to-December trend continued into the March quarter, giving Mr Banducci confidence that his turnaround strategy is on the right track.
He said Woolworths was comfortable its prices were now competitive with Coles' and suggested that no more major cuts were needed to lure value shoppers such as young families back into stores.
"These major steps are hopefully a thing of the past for us," he said. "We feel that we're very competitive today [but] we need to do a better job of communicating it."
'Cautious optimism'
However, Mr Banducci stopped short of forecasting a return to profit growth in supermarkets in the June half after first-half earnings before interest and tax fell 14 per cent – weighed down by $110 million in staff incentives – and margins hit 4.3 per cent, the lowest level since 2004.
"Cautious optimism is my modus operandi at all times," Mr Banducci told The Australian Financial Review.
"We'll see how the market reacts, we'll see where meat prices go, we'll see how our competitors react to the news – there are a lot of moving pieces," he said. "I'm sure [Coles] have a good plan, hopefully our plan is as good."
Investors were more optimistic, sending Woolworths shares up 4.4 per cent to $26.63, the highest since October 2015.
"'We are beginning to see the impacts of the turnaround strategy undertaken by the new Woolworths board and management team," said Paul Skamvougeras, head of equities at Woolworths' largest shareholder, Perpetual Investments.
"The progress to date is pleasing. In our view there remains considerable opportunity to further improve," he said.
Sales focused
JPMorgan analyst Shaun Cousins is convinced the worst is over.
"There's a real food turnaround going on at Woolies," he said, adding that while EBIT margins fell sharply they could have been worse and had probably bottomed in calendar 2016.
"They are high relative to global peers but they've fallen from a really elevated level when you had a company that was profit focused rather than sales focused," Mr Cousins said.
While supermarkets now appear to be back on track and Woolworths has ended its disastrous foray into home improvement after closing Masters and selling Home Timber & Hardware to Metcash's Mitre 10, Mr Banducci faces new problems at BIG W.
The discount department store chain plunged $100 million into the red – losing $27 million compared with a profit of $73 million previously – after Woolworths booked $35 million in impairments and provisions. Excluding impairments, BIG W's earnings fell to $8.1 million as sales slumped 6.3 per cent to $2.05 billion.
Woolworths does not expect any improvement in the June half and if the business deteriorates Woolworths may have to slash BIG W's $360 million book value.
Fixing BIG W
Mr Banducci has launched a review of BIG W's strategy following the sudden resignation in November of chief executive Sally Macdonald after less than a year in the role. The review is expected to be finalised in the second half and is likely to lead to less-radical changes to sourcing and range than Ms Macdonald had proposed.
"We had similar issues in BIG W as supermarkets – we tried to do too much too quickly and in retail that's very hard to execute and you end up dropping the ball," Mr Banducci said.
He ruled out selling BIG W until it had been fixed, saying: "The business isn't bankable on the current numbers and we need to work very hard to change that." The sale of EziBuy, which has been on the market since August, was a "work in progress".
Woolworths defended the decision to cut its interim dividend a higher-than-expected 22 per cent, saying it reflected the reduction in group profits, including losses from Masters, and its 60 per cent first-half payout ratio.
Group net profit on a statutory basis was $725.3 million compared with a loss of $2.1 billion in the first-half of 2016 ($972.7 million before significant items), when Woolworths wrote down the value of Masters by $2 billion.
Woolworths classified its 527 petrol stations and convenience stores as discontinued operations after reaching agreement on December 27 to sell the business to BP for $1.78 billion, conditional on regulatory approvals, which are expected to take until January 2018.
Petrol earnings rose 26 per cent to $74.1 million, including the cost of funding petrol discounts, which was $36 million.
Woolworths is also now separately reporting earnings from Endeavour Drinks, formerly known as Woolworths Liquor Group. EBIT rose 3.1 per cent to $302.3 million as higher staff bonuses crimped margins. Sales rose 4 per cent to $4.3 billion, with comparable sales up 2.4 per cent.
Woolworths also booked another $117 million in losses from home improvement, compared with losses of $125 million in the previous period.