Woolworths Group’s first-half results contained good news as far as Australian supermarket sales go. Supermarkets are the future battleground in the Woolworths turnaround and its performance is on the right track, although costly in terms of price investment.
Woolworths Group posted a half-year profit of $725.3 million, despite a 13.9 per cent decline in underlying earnings from its Australian food division. Australian Food sales revenue was $18.7 billion, an increase of 2.8 per cent over the year before.
Big W was a drag on group performance and the extent of the problem has surprised the market. The division reported a loss of $27.2 million, with earnings plummeting 88.9 per cent to $8.1 million off a comparable sales decline of 6.3 per cent during the half.
As far as price investment in the supermarket division goes, the Woolworths improvement in sales comes after they invested heavily in lowering prices to match Coles, which has led Woolworths in like-for-like store sales over the past seven and a half years.
As usual, Endeavour Drinks Group and the joint-venture hotels business performed strongly, with Woolworths’ retail liquor units remaining a thorn in the side for Coles.
Woolworths’ share price, which has been trending upwards since the start of February, closed at $26.63 at the end of trade after the results release.
UBS analysts say they believe a turnaround at WOW is underway, but that there’s still a lot to do, and, although they have upgraded their forecasts, risks remain. The result was better than UBS expectations.
The key risk, say UBS, is an irrational competitive response based on Coles’ recent comments about never giving up on low prices.
UBS notes that this was alleviated by Woolworths during an analyst briefing, where Woolworths referenced a c7% drop in 1H promotional activity, no material step-up in Q2 competitive intensity, and the large opportunity still available to improve performance by cutting shrinkage, cost-out and store renewals.
Woolworths Group sales for the half were $32.2 billion, including discontinued operations home improvement $903 million and petrol $2.36 billion.