Woolworths hit by Endeavour shares loss, New Zealand supermarkets sales slide

The supermarket giant has booked a $209m loss on its shares in Endeavour Group and revealed impairments in its struggling New Zealand chain of $1.45bn.

Woolworths will be hit with $209m in losses from its shares in Dan Murphy’s owner Endeavour Group, as well as an earnings slump at its New Zealand supermarkets.

Woolworths’ disastrous start to the new year, which began with a ­customer revolt over its refusal to stock Australia Day thongs, flags and stubby coolers, has worsened after booking a $209m loss on its shares in pubs and drinks owner Endeavour Group and a $1.45bn impairment on its struggling New Zealand supermarket chain.

After underperforming for years and requiring extra investments to improve its stores and ­operations, Woolworths has revealed that, following a review of the New Zealand supermarket segment’s forecasts for the next three years, a non-cash impairment of $NZ1.6bn would be recorded as a significant item in the December half results. The impairment will represent a writedown against the current goodwill balance of $NZ2.3 billion.

The market took the bad news in its stride however, with Woolworths shares only falling 1c to $36.19, given the impairments non-cash nature should not crunch the company’s ability to pay a decent dividend for the ­December half.

The hundreds of millions of dollars in impairments that will be booked in its December results, and which will shave its underlying profitability, comes as Woolworths and the supermarket sector faces at least four inquiries into operations, including allegations of price gouging.

Last week, the federal government brought in the ACCC to conduct its own inquiry.

Still carrying the bruises from a brutal pile-on over its Australia Day merchandising decision, Woolworths said on Monday its New Zealand supermarkets chain and Big W general merchandise stores had suffered through a “more challenging” half.

This was countered however by “solid” performances from its ­flagship Australia supermarkets division, its digital operations at WooliesX and its food services arm PFD.

Woolworths expects unaudited EBIT before significant items for the first half of fiscal 2024 to be $1.682bn to $1.699bn, against $1.637bn for the same period last year, which represents EBIT growth before significant items in the range of 2.8 per cent to 3.8 per cent.

The earnings and impairments pain will flow from its New Zealand supermarkets business as well as its 9.1 per cent stake in ­Endeavour Group, the demerged company that owns Dan Murphy’s, BWS and 350 pubs, the share price of which has collapsed in value.

Woolworths will issue its half-year results on February 21. Picture: NCA NewsWire / Nikki Short

E&P Capital retail analyst ­Phillip Kimber said Woolworths had been struggling with its New Zealand business for a while, with recent tough macro-economic conditions also weighing on performance.

He said New Zealand supermarket margins had ranged between 4.4 per cent and 5.5 per cent over the past 15 years, and were weakening.

“EBIT margins in fiscal 2024 look like they will be around 2 per cent,” Mr Kimber said.

“Woolworths has broadly met E&P and consensus expectations despite material weakness in NZ supermarkets. Whilst this implies a stronger than expected performance from the key Australian food (supermarkets) business, its nonetheless disappointing that the NZ supermarket business continues to be volatile.”

There would be a $209m loss recorded on the value of Woolworths’ shares in Endeavour while, at its New Zealand supermarkets, first-half earnings would fall by 42 per cent despite a range of initiatives to lift performance.

Woolworths is Endeavour’s second largest shareholder and the share price has fallen by almost one-third from its peak in late 2022 after it demerged from Woolworths. The Dan Murphy’s owner was also mired in a damaging and bitter boardroom and shareholder civil war last year that dragged in Woolworths and proved a distraction for the Endeavour board and management.

“The group (Woolworths) has reviewed the facts and circumstances that affect the group’s assessment of significant influence over Endeavour Group and believes that as at 31 December 2023, it no longer has significant influence,” Woolworths said in its trading update on Monday.

“As a result, the group will ­derecognise its equity accounted investment in Endeavour Group and recognise an investment in Endeavour Group as a financial asset, measured at fair value.

“This is expected to result in a loss of $209m, which will be recognised as a significant item in the group’s profit or loss based on an Endeavour Group closing share price of $5.21 on 31 December 2023. Any subsequent gains or losses on the mark-to-market of the investment will be recognised in other comprehensive income within equity.”

Woolworths said due to the loss of significant influence over Endeavour, it would no longer recognise its share of Endeavour Group’s profit or loss in the “other” segment’s EBIT. Future dividends from Endeavour Group would be recognised as ­income in the “other” segment when declared.

In New Zealand, despite early progress, including an improvement in sales momentum towards the end of the second quarter, the trading performance had continued to be challenging, with first half EBIT expected to be $NZ71m, 42 per cent below the prior year.

The result includes approximately $NZ13m of costs associated with the transformation of Woolworths New Zealand.

Woolworths will issue its half-year results on February 21.