Slowing sales hit Woolies earnings

Woolworths’ wages underpayment scandal and slowing sales trajectory has taken the lustre off a strong first half.

Woolworths CEO Brad Banducci Picture: Adam Yip

Woolworths’ wages underpayment scandal, the potential cost of which has now blown out by almost double previous estimates to $395m, and slowing sales trajectory since Christmas has taken the lustre off a strong first-half result that included a return to profitability for Big W for the first time in four years.

Chief executive Brad Ban­ducci again offered his apologies for the unpaid wages that last year was estimated to be between $200m and $300m but have now been updated to $315m, with an extra $80m in interest payments thrown on top, with investigations still proceeding.

But it was the weakened sales trajectory at its supermarkets arm that caught the attention of many investors as same-store sales growth of 3.8 per cent deteriorated to about 2 per cent for the first seven weeks of the second half.

The comparable sales gap between Woolworths and Coles has narrowed to just 20 basis points and is its skinniest in a year, with Coles now on track to outperform Woolworths for the first time since 2017.

However, Woolworths supermarkets were hit by disruptions from the bushfires, with as many as 130 of its stores within or near communities ravaged by the fires over Christmas and the New Year.

“We were pleased that in a volatile trading environment, all businesses delivered sales and earnings growth,’’ Mr Banducci said as the retailer on Wednesday unveiled a 6 per cent gain in revenue to $32.41bn.

Net profit slumped 7.7 per cent to $887m due to the $80m in costs of paying back staff their lost wages. Woolworths said net profit from continuing operations but before one-off items was $979m, a 15.7 per cent increase.

Mr Banducci said he believed he had a “good plan” to address the slowdown in sales for the beginning of the second half.

The continued restructure of struggling general merchandise chain Big W finally seems to be paying off, as the retailer posted a first-half profit for the first time since the 2016 fiscal year and Woolworths confirmed it was on track to return a profit for the full year as well. Big W recorded a pre-tax profit of $50m, against a loss of $8m in 2019.

The earnings improvement was driven by sales growth in the half of 2.8 per cent to $2.149bn and a stronger 3.2 per cent lift in same-store sales for the second quarter due to a much better performing apparel category.

Both Woolworths liquor retail chains and its hotels — which have now been placed into a newly created business called Endeavour Group, which could be spun out or sold later this year — recorded sales growth despite difficult trading conditions flowing from poor weather and the bushfires.

Endeavour Drinks’ total sales for the first half were up 4.7 per cent to $4.775bn as earnings lifted 15 per cent to $338m. There was growth in the spirits category, particularly gin and vodka, while wine volumes were subdued.

The hotels division recorded a 6.2 per cent gain in revenue to $919m as earnings increased 39.7 per cent to $224m. Normalised earnings were up 8.3 per cent after accounting for recent changes to the treatment of leases.

Jefferies analyst Michael Simotas described it as a “solid” result and better than expected across every division. However, he said its Australian supermarket sales were disappointing compared with Coles.

“While it is only a short period, the slowdown in sales from Australian Supermarkets in the first seven weeks is disappointing with only around 2 per cent like for like,” he said. “This is well short of our third-quarter estimate of 3.6 per cent like for like and it ­appears Woolworths may be underperforming Coles.”

Bryan Raymond at Citi said Woolworths’ half-year underlying pre-tax earnings of $1.604bn was about 2 per cent ahead of consensus forecasts and was underpinned by a return to profitability for Big W and its hotels business.

Citi said the positives of the result included Big W pre-tax earnings of $21m driven by favourable product mix (apparel) and increased promotional effectiveness, but there were negatives too, with supermarket like-for-like sales growth in the second quarter of 3.8 per cent, down from 6.6 per cent in the first quarter.

Woolworths declared an interim dividend of 46c a share, up 2.2 per cent from last year, and payable on April 9.