Woolworths delivers stronger profit margins, vows to keep lid on prices

Chief executive Brad Banducci has delivered stronger profit margins for his flagship supermarkets but denies it was at the cost of gouging customers on price.

Woolworths chief executive Brad Banducci has delivered stronger profit margins for his flagship supermarkets but denies it was at the cost of gouging customers on price, and has pledged to push food and grocery prices lower this year given the pressure households are under.

The near elimination of Covid-19 costs, which in the previous year roped in everything from security guards to rigorous cleaning regimes and cost Woolworths $323m, boosted profit margins and could be delivered back to shareholders.

Mr Banducci said there was always a balancing act between the needs of customers and shareholders, adding “we don’t always get the balance right in any one year”, but he was “acutely aware of the pressure our customers are under”.

However, for Woolworths it underwrote a respectable profit performance in 2023 and a higher dividend, boosted by a 70 basis point leap in margins at its supermarkets to 6 per cent, near record highs for the group.

Woolworths posted a 79.6 per cent drop in annual profit to $1.618bn due to the one-off impact of the Endeavour Group demerger, with underlying profit up 4.6 per cent, in contrast to the weaker results reported on Tuesday by rival Coles.

The chasm between the nation’s two largest supermarket chains has begun to widen across profits, earnings and dividend growth and now share price after both reported their results.

Coles shares dropped 7 per cent on the release of its results, which one analyst called “messy” and were hit by cost blowouts at its new automated warehouses and claims of a spike in theft, while Woolworths shares initially rose 5 per cent. Since the beginning of the year Woolworths shares have easily outperformed Coles, rising 13 per cent against a 3.39 per cent fall for Coles.

Mr Banducci wouldn’t be drawn on the emerging theme that Woolworths was now beating Coles on key metrics.

Woolworths boss Brad Banducci said the retail sector has returned to ‘relative stability’ after the pandemic. Picture: Getty Images

“I’m fiercely competitive of course, but that’s not the main game for us, the main game is focusing and getting this balance right for customers, teams and shareholders. I think we did that in fiscal 2023, but that is for others to judge,” he said.

Woolworths shares ended up $1.27 at $37.49 while Coles was 6c weaker at $15.95.

Woolworths said 2023 revenue rose 5.7 per cent to $64.29bn. Group earnings before significant items increased by 15.8 per cent to $3.1bn with second-half EBIT increasing 13.1 per cent to $1.47bn. Strong EBIT growth in Australian supermarkets, Australian B2B and Big W was offset somewhat by lower earnings from the New Zealand supermarkets and higher costs.

Woolworths declared a final dividend of 58c per share, up from 53c, payable on September 27.

Mr Banducci said although more normal shopping behaviours were returning, those consumers with families and mortgages were increasingly searching for value and being careful with their spending.

“While overall customer demand has been remarkably stable, we are increasingly seeing our customers become more careful in their spending patterns, particularly our ‘Saver Families’ and in more discretionary categories,’’ he said.

“Despite the more stable environment, our overall customer experience was inconsistent, impacted by lingering supply chain challenges, and more recently by the impact of inflation on value for money perceptions.”

Woolworths would focus on lowering prices in 2024 to help ease the burden of its shoppers. “The most important thing we need to do is provide value for our customers.”

He said it was critical to view the earnings spurt in the context of large investments previously in Covid-19 safety, infrastructure and other operations but there would be further investment in prices over 2024.

“I do feel that in 2023 in general we managed to achieve that outcome (balance between shoppers and shareholders) it doesn’t mean that we don’t have more to do in 2024.”

The flight to value was most evident in the performance of its discount department store Big W which is more dominated by discretionary categories such as homewares, kitchen appliances and fashion.

Sales at Big W rose 8 per cent to $4.785bn, but reversed towards the end of the year and for the first eight weeks of 2024 Big W sales dropped 6 per cent as it was impacted by the broader discretionary spending slowdown – although some categories such as “everyday essentials” were performing strongly.

For its flagship Australian supermarkets, sales rose 5 per cent to $48bn and earnings lifted 19.1 per cent to $2.865bn. Earnings at Big W rose 165.3 per cent to $145m and Woolworths growing B2B business – which includes food services such as its PFD arm – saw sales lift 17.4 per cent to $4.324bn as earnings lifted 13 per cent to $63m.

On current trading and outlook, Mr Banducci said sales in the first eight weeks of the year had shown similar trends to the fourth quarter with solid growth in its supermarkets but B W sales declining on the prior year. Woolworths food retail sales growth for fiscal 2024 to date remained strong at 6.5 per cent.

“We remain cautiously optimistic about the year ahead and are confident in the plans we have in place. However, EBIT growth in Australian (supermarkets) in fiscal 2024 needs to be viewed in the context of the cost inflation and a strong focus on delivering value for customers.”