Woolies reclaims supermarket title

Woolworths has returned to profit for the half year, but underlying earnings slipped and it’s again reviewing Big W.

Woolworths CEO Brad Banducci. Pic: Hollie Adams

Retailer Woolworths has reported a return in profit for the half-year as its supermarket operation outperformed key rival Coles for the first time in more than seven years.

However, the group’s earnings fell short of market estimates, while persistent pain at department store Big W has forced a further review of that operation.

The profit recovery comes on the heels of a tumultuous 2016 that saw persistent troubles at Big W drag on profits as well as a heavy writedowns tied to its disastrous foray into hardware.

For the six months to December 31, the group (WOW) booked profit of $725.3 million, up from an impairment-hit $972.7m loss in the corresponding period last year.

The figure was under market projections for a reading of $819m.

Despite the earnings bounce the company trimmed its dividend, offering a 34c interim payout to shareholders as against 44c last year as underlying profit weakened.

Analysts had been tipping a more robust payout of 45c a share.

Its net profit from continuing operations slid 16.7 per cent to $785.7m despite a 2.6 per cent rise in sales to $29.06 billion.

Traders shrugged off news of the profit failing to meet market projections and instead focused on a better comparison to Coles, driving shares in the retailer up 2.4 per cent to $26.11 by 12pm (AEDT).

Investors were eager to see whether Woolworths had once again closed the gap on Coles after a heavy price investment, with Woolworths revealing that in the second quarter it had finally surpassed its peer on comparable store sales.

Coles posted like-for-like sales growth of just 1 per cent for the quarter, while Woolworths today reported a robust 3.1 per cent improvement.

It is the first time in 30 quarters that Woolworths had outperformed Coles on this measure.

However, analysts had been expecting the change in fortunes given Woolworths had made a major investment on cutting prices and Coles was cycling a strong comparison to last year.

The comparisons for last year were Coles at 4.9 per cent sales growth as against Woolworths with a negative 1.2 per cent reading, making this the prime opportunity for the latter to turn the tables.

“The stock has baked in some significant expectations, which have been partly met at the comp sales and cashflow lines, but sustainability of both metrics remains uncertain,” Macquarie said.

“EBIT margins in food were lower than expected and guidance suggests limited upside in 2H17.”

The analysts labelled it a “decent recovery” overall, a view similar to the group’s chief executive Brad Banducci.

“We’ve made good progress on our five key group priorities during the half,” he said.

“Particularly pleasing was the improvement in sales momentum in Australian Food, especially in the second quarter. This is on the back of strong Voice of Customer (VOC) scores and is underpinned by continued growth in customer transactions and, more recently, items per basket.

“This momentum gives us confidence that, while we still have a lot to do, we are on the right track.”

The company noted sales trends had “continued into the third quarter” in a pleasing result for investors given the December growth was its highest since July 2014, although it warned on earnings given its continued investment in making its stores more competitive.

That investment had weighed on profit through the first-half as the food division saw pre-tax profit slide 13.9 per cent to $811.6m despite a 2.8 per cent sales rise.

“While we expect trading conditions to remain competitive for the remainder of FY17, we are focused on building the sales momentum we have achieved over the last six months as we work to restore sustainable growth in Australian Food,” Mr Banducci said.

“We note, however, that the second half will also be a period of continued investment in improving the store experience, depreciation from our renewal and IT investments and higher team incentive payments.”

Investors were also eyeing results at the group’s discount department store Big W, which saw the shock resignation of boss Sally Macdonald in November as its turnaround plan stalled.

Through the first-half the unit logged a pre-tax loss of $27.2m, weighed by a further $35.3m impairment.

The weak numbers were highlighted by a 6.3 per cent slump in comparable sales for the division, which dragged underlying pre-tax profit down 88.9 per cent to $8.1m.

Woolworths began a new turnaround plan that would take three to five years upon Ms Macdonald’s appointment a year ago, but already it appears a plan B is in the works.

“We are currently reviewing the BIG W strategic plan and this will be completed in the next few months,” Mr Banducci said, noting the unit was a “work in progress”.

In its other divisions, the group reported a 3.1 per cent rise in pre-tax earnings to $302.3m at its Endeavour Drinks arm, a 2.4 per cent lift in pre-tax earnings to $154.9m at its NZ unit and a 3.1 per cent advance in its pre-tax profit to $139.3m for its hotels division.

The Endeavour Drinks division includes Dan Murphys and BWS outlets, with both retailers reporting positive comparable sales growth.