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Woolworths profit up 16pc but CEO warns June quarter sales will fall

Sue MitchellSenior reporter

Key Points

  • Revenue ($b) 35.8, up 10.6pc from year-earlier 32.4 
  • Pre-tax profit ($m) 1680 v 1322
  • Net profit ($m) 1135 v 887
  • Interim dividend 53c v 46c, payable on April 14 

Woolworths’ underlying net profit surged 15.9 per cent to $1.14 billion in the December half as stay-at-home consumers spent more on food and groceries, liquor, homewares and toys, offsetting $277 million in COVID-19-related costs.

Chief executive Brad Banducci said sales were expected to fall in the June quarter as Woolworths lapped the strong sales growth achieved during pantry stuffing and panic hoarding at the start of the pandemic. However, COVID-19 costs were expected to fall, mitigating the impact on earnings.

“Looking ahead to the rest of the financial year, we expect sales to decline over the March-to-June period compared to the prior year in all our businesses, with the exception of hotels where venues were closed for much of the final four months last year, as we cycle last year’s COVID surge,” Mr Banducci said.

“However, in parallel, we also expect COVID-related costs to be materially below the prior year, subject to no further widespread prolonged lockdowns.”

Woolworths’ sales growth remained elevated in the December-half, while COVID-19 related costs fell.  Jacky Ghossein

The December-half net profit result, excluding one-off items in the year-ago period, was slightly ahead of consensus forecasts around $1.1 billion.

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Earnings before interest and tax across the group rose 10.5 per cent to $2.09 billion, beating consensus of $1.99 billion, as double-digit profit growth in supermarkets, BIG W and Endeavour Drinks offset a 45 per cent drop in earnings from hotels, which were hard hit by trading restrictions.

Group sales rose 10.6 per cent in the six months ended January 3 to $35.84 billion, falling just short of consensus of $35.9 billion.

Woolworths’ online sales grew faster than Coles’, rising 78 per cent across the group to $2.9 billion or 8.2 per cent. Online sales rose 92 per cent in food and 44 per cent in liquor.

Mr Banducci said group sales for the first seven weeks of the June-half had remained strong, benefiting from continued at-home consumption, Australians not travelling abroad, and a weaker prior year where sales were impacted by bushfires.

“In general we’re seeing relatively consistent elevated demand right across Australia right now,” Mr Banducci said, adding that toilet paper sales were still above normal as people spent more time at home.

Woolworths’ supermarkets outperformed Coles in the June-half to date, with total sales rising 8 per cent and same-store sales by about 7 per cent in January and February, compared with Coles’ same-store food sales of 3.3 per cent.

Woolworths’ food sales growth in the December quarter and in January and February was more in line with market growth (around 8.8 per cent) suggesting that Woolworths is maintaining market share while Coles is losing share to independents such as Metcash’s IGA retailers.

Mr Banducci said Woolworths’ priority in the June-half would be accelerating its digital capabilities as digital engagement and e-commerce became an increasingly important part of the shopping journey for customers.

“I don’t think it will be long before digital visits exceed physical visits across all our stores,” he said.

“We have added significant e-commerce capacity across the group over the last year
which puts us in a strong position to meet our customers’ demands.

“As growth rates in the second half slow as we cycle peak COVID-demand, we have an opportunity to optimise e-commerce at scale and deliver further efficiency.”

Drinks demerger reactivated

Woolworths’ supermarkets drove most of the profit growth in July-December, with earnings rising 13 per cent to $1.33 billion as grsso amrgins rose 11 basis points and cost of doing business margins were flat.

Supermarket sales rose 10.6 per cent to $23.4 billion, with demand for food and groceries remaining elevated amid sporadic lockdowns.

At Endeavour Drinks, earnings rose 24 per cent to $419 million as total sales rose 19 per cent to $5.7 billion and online sales by 50 per cent, boosted by at-home consumption. This offset a 45 per cent drop in profits from hotels to $122 million.

Drinks sales in January and February rose 14 per cent. Hotel sales fell 12 per cent but earnings are expected to rebound this half.

Mr Banducci said the $10 billion spin-off of Endeavour Drinks, which was postponed last year due to the pandemic, was now expected by June, most likely by a demerger. Woolworths expected to incur separation costs of $45 million to $50 million in the June-half, taking the total cost to about $275 million.

Mr Banducci refused to confirm whether Endeavour had received approaches from potential private equity buyers such as BGH Capital.

“We’re now engaging again on the demerger - in that process we’ll consider all value accretive options,” he said.

Woolworths will consider potential capital management, such as a share buy-back or capital return, once it has established the right capital structure for the two businesses.

BIG W was the biggest surprise, with earnings soaring 166 per cent to $133 million as sales rose 20.1 per cent to $2.58 billion - beating 9 per cent sales growth at Wesfarmers’ Kmart Group - buoyed by seasonal events such as Halloween, Click Frenzy, Black Friday and Christmas.

Sales in the first seven weeks of the June-half remained very strong, growing 18 per cent.

Big W’s online sales soared 120 per cent, with online penetration reaching 9.5 per cent. Profit growth was driven by strong sales, gross margin improvements and good cost control despite higher COVID-related costs.

Woolworths originally planned to review the future of BIG W once the chain had returned to profitability, but Mr Banducci indicated he was now comfortable to see BIG W remain in the stable.

“Our plan is to continue to build on all the great work that’s been done and that’s our focus going forward,” he said. “There’s the ability to build closer relationships between BIG W and the rest of the group.”

Earnings growth from New Zealand supermarkets was subdued by the lack of international tourism, with profits rising 3 per cent to $181 million on similar growth in sales to $3.4 billion.

Woolworths lifted its interim dividend to 53¢ a share, payable April 14, up from 46¢ a share in 2020.

Jarden analyst Ben Gilbert said it was a good result, cashflows were strong and trading updates were better than expected - “the only disappointment for us was the dividend.”

The demerger of Endeavour Drinks in June would be a positive catalyst for the shares, Mr Gilbert said.

Measure
Measure
Summary | 9 Annotations
$1.14 billion in the December half
2021/02/24 04:56
Brad Banducc
2021/02/24 04:56
Group sales rose 10.6 per cent in the six months ended January 3
2021/02/24 04:58
Woolworths’ online sales grew faster than Coles’
2021/02/24 04:58
adding that toilet paper sales were still above normal as people spent more time at home.
2021/02/24 04:59
Woolworths is maintaining market share while Coles is losing share to independents such as Metcash’s IGA retailers.
2021/02/24 04:59
“I don’t think it will be long before digital visits exceed physical visits across all our stores
2021/02/24 04:59
Endeavour Drinks,
2021/02/24 05:00
BIG W was the biggest surprise, with earnings soaring 166 per cent to $133 million as sales rose 20.1 per cent to $2.58 billion
2021/02/24 05:01