Woolworths to reward shareholders but profit result disappoints

Woolworths will return up to $1.7bn to shareholders, but its shares slumped as its profit fell short of expectations.

A Woolworths store in Sydney. Pic: AAP

Woolworths will reward its long-suffering shareholders by returning up to $1.7 billion of capital flowing from the recent sale of its petrol arm.

It came as the supermarket giant posted a 1 per cent lift in half-year profit to $979 million as group sales rose 2.2 per cent to $30.704 billion. Woolworths declared an interim dividend of 45 cents per share, up from 43 cents, payable on April 5.

But Woolworths’ share price dived in early trade as analysts said its net profit from continuing operations of $920m was 6 per cent below the market consensus estimate.

“This is a poor result,” said Macquarie Equities analyst Rob Freeman.

Releasing its latest earnings update, Woolworths supermarkets did show positive sales momentum through the December half, improving sales at Big W, but this was countered by a surprise sharp retreat in earnings at its market leading liquor chain Dan Murphy’s.

Woolworths has also warned that it expects the trading environment to remain challenging in 2019 amid subdued consumer spending.

The nation’s biggest retailer said its flagship Australian supermarkets had also posted strong sales growth momentum for the December half, with this continuing for the first seven weeks of the second half of the financial year, as sales increased “modestly”, which is better than Coles, which yesterday warned of flat sales in recent months.

The company also revealed that its long struggling Big W general merchandise chain had recorded improved sales in the first half of 2019 – with like-for-like sales jumping 3.8 per cent - but profit had been impacted by category mix and clearance sales. It is currently reviewing its store and distribution centre network.

There were also lower earnings from its powerhouse Endeavour Drinks division, which includes juggernaut retail chain Dan Murphy’s, as it was dragged down by a low growth market.

In a move that will please Woolworths shareholders who have suffered from a series of setbacks at the group, led by the billions of dollars lost on the Masters hardware experiment, losses at Big W and a supermarket arm that had lost its leadership position in the face of a resurgent Coles, Woolworths said that after the sale of its petrol business to EG Group it intended to return to its shareholders up to $1.7 billion in capital.

The petrol sale is expected to be completed in March.

Woolworths said customer feedback has remained strong, with a positive Christmas trading period despite a market slowdown in both Australia and New Zealand.

At its key earnings driver, Australian supermarkets, sales for the half rose 2.3 per cent to $19.89 billion as earnings rose 4 per cent to $937 million.

It said sales growth was muted by a number of factors in the first half including the removal of single-use plastic bags from the chains, the fact that Coles continued to have plastic bags for a few months after Woolworths had eliminated them and wetter weather conditions in key trading weeks before Christmas. Sales momentum improved in the second quarter, up 2.7 per cent and has shown some further gains in the third quarter.

At Endeavour Drinks, sales rose 1.8 per cent to $4.59 billion as pre-tax earnings slipped 6.4 per cent to $290 million. Woolworths conceded that trading at its retail brand Dan Murphy’s was below expectations, driven partly by cooler temperatures, increased rainfall in some parts of Australia and a general weakening of wine and beer sales.

Big W, which has been mired in losses for years, saw sales gain 2.7 per cent to $2.09 billion as the pre-tax loss for the division fell to $8 million from a loss of $10m in the previous corresponding period. But there was some hope for a continued improvement as same store sales in the second quarter leapt 5 per cent and overall like-for-like sales in the half were better by 3.8 per cent.

At its hotels, Woolworths said sales increased 0.5 per cent to $865 million as earnings slipped 1.5 per cent to $161 million.

Woolworths chief executive Brad Banducci said that while trading across the group for the first seven weeks of the second half had improved following more settled weather, Woolworths expected a more subdued consumer environment to continue for the foreseeable future.

Macquarie’s Mr Freeman noted that Woolworths’ earnings before interest and tax - a measure of operating profitability - missed the consensus by about 4 per cent, driven by food and liquor and and Big W.

Outlook comments were “bearish”, similar to Coles’, with Woolworths indicating “a more subdued consumer environment” ahead.

“We note this is now the third miss from Woolworths in the last three half years, and the group is clearly struggling to derive the positive operating leverage some in the market are calling for,” Mr Freeman said.

“Whilst capital management may placate some investors, we caution here given big lease adjusted balance sheet and weak operating conditions hindering EBIT.”

Woolworths shares dived 6.2 per cent to a two-month low of $28.34 in early trade.