Woolworths chief executive Brad Banducci will be hailed a hero for achieving what looked impossible just 18 months ago: growing like-for-like sales faster than rival Coles for the first time in eight years.
However, narrowing the gap in the $80 billion supermarket sales war has come at a price and some context is needed when cheering on the Woolworths turnaround. It is worth remembering this was Australia's worst-performing company just over a year ago, as prior management's high-margin strategy and a botched push into hardware left the group in serious financial strife.
The trade-off for the turnaround in sales is Woolworths' decision to slash dividends by 22.7 per cent. Margins are now at a 12-year low to 4.3 per cent. This effectively means shareholders are now subsidising the lower prices customers are enjoying in Woolworths supermarkets.
Woolworths is now profitable after taking more than $3 billion in write-downs last year and Banducci has made good progress offloading the Masters hardware chain, revamping the loyalty program and selling its petrol station network to BP. Loss-making Big W is the outstanding problem child after posting another disappointing result.
Banducci, as expected, has demonstrated he is making headway fixing the core supermarkets business after investing aggressively in price and service. While the company's earnings fell short of consensus forecasts, the momentum it experienced in like-for-like sales in the back-end of the half-year is good news which is reflected in the 4 per cent lift in the group's shares on Wednesday.
Woolworths has reported like-for-like sales growth of 1.9 per cent in the first-half. However, performance improved significantly in the second quarter when sales rose 3.1 per cent compared to 0.7 per cent in the first quarter. Analysts had been tipping first-half like-for-like sales of 1.5 per cent to 1.7 per cent.
The second-quarter sales growth also smashes the 0.9 per cent lift from Coles in the same period. This is an important milestone for Banducci as Woolworths has not been able to do that since 2009. But are two consecutive quarters of growth enough evidence that the turnaround is permanent? Coles boss John Durkan will not sit idle and let the underdog eat into his business and newcomers like Aldi and Costco remain serious threats to market share.
Banducci says that consistency has continued into the first seven weeks of the second-half but cautions unseasonably warm weather [in some areas] has helped.
Price war nerves
Woolworths has poured $1 billion into lower grocery prices over 18 months which has enabled it to win back share but investing at that kind of level is unsustainable in the medium-term. The danger for investors in both companies is that both rivals start behaving irrationally and trigger a grocery price war.
The problem for Woolworths is that it has been so focused on the repair job that it has no long-term growth strategy. Investors are heartened by the turnaround in the short-term but Banducci is selling assets like petrol stations, and Big W is also likely to go unless he can perform a miracle. There are no immediate plans to grow other parts of the business such as hotels and gaming.
Earnings before interest and tax fell 14.5 per cent to $1.3 billion while net profit slumped 16.87 per cent to $785.7 million. Earnings are down because of the investment Banducci has had to make in reducing prices, improving service and investing in information technology.
Banducci has been careful not to overplay expectations and has been surprised by the way the market has embraced the company's performance under his watch so far.
He expects trading conditions to remain competitive for the rest of the year and says the company will continue to invest in its stores and staff but is not giving much else away in terms of the outlook.
Big W's performance remains disappointing, reporting a loss of $27.2 million. Like-for-like sales fell 6.3 per cent and there is no sign of improvement. Woolworths has launched yet another strategic review of the business.
michael.smith@fairfaxmedia.com.au
