Has Woolies turned the corner?

Woolworths supermarkets are operating at a lower profit margin to Coles for the first time in eight years.

Woolworths CEO Brad Banducci. Pic: Adam Yip

Woolworths supermarkets are operating at a lower profit margin to Coles for the first time since Wesfarmers acquired the latter business, and have kicked off this year with positive comparable store sales for the first time in a year.

The obvious question is whether this means Woolies has turned the corner.

Woolworths CEO Brad Banducci is far too smart to answer that question, but says he is “cautiously optimistic” following today’s announcement of a $1.23 billion loss.

The stock market certainly believes the story, with Woolies shares up some 6.8 per cent today at $25.87, after a year in which the stock has been under the market to the tune of 15.9 per cent.

That's a fair weight of underperformance to catch up.

Perpetual’s Paul Skamvougerous for one will hope momentum continues, because he owns a touch over five per cent of the stock in a $1.7 billion bet on the turnaround.

Profit margins are a big issue at Woolies and in the last year Banducci has cut them from 7.3 to 4.47 per cent, compared to Coles at 4.7 per cent.

When Wesfarmers first acquired Coles back in 2008 then supermarket boss Greg Foran wanted to cut margins to kill the competition, but his boss Michael Luscombe stupidly refused and kept the gap.

That allowed Coles to expand and it has outperformed Woolies now for the last seven years straight.
Asked what his secret has been, Banducci says it’s been about consistency of message, of putting customers first.

Woolies profit numbers were a basket case, as expected, with sales down 1.2 per cent, earnings before interest and tax down 55 per cent at $1.6 billion and a loss of $1.2 billion after the recent writedowns.

Banducci has been on the job for the last six months, which has included the $1.5 billion shutdown of the failed Masters stores.

Banducci is right to say there is lot more work to do but the good news is he is finally gaining some traction, even if he hasn’t quite turned the corner.

This means John Durkan at Coles has some more competition to deal with, which isn’t exactly news for him.

Coles’ growth slowed in the second half, up three per cent but down from first half growth of 5.6 per cent.