Woolworths announces profit growth in first half
Supermarket group Woolworths has announced a net profit after tax for the first half of the 2014 financial year of $1,321.7 million, up 14.5 per cent on the same period in the previous year.
Net profit after tax from continuing operations before significant items increased by 6 per cent for the 27 weeks ending 5 January 2014. Total earnings before interest and tax (EBIT) for the group were $2,048 million, up 11.3 per cent on the same period in the previous year, and EBIT from continuing operations before significant items increased 5.9 per cent. Total group sales for the period were $31.8 billion, up 3.8 per cent on the previous year.
Woolworths said its focus in the last two years had been to commence the transformation of the business through its strategic priorities.
Australian Food and Liquor
Woolworths reported 6.8 per cent EBIT growth in its Australian Food and Liquor business, which it said was consistent with its priority to ‘extend its leadership in Food and Liquor’.
Sales for the half year were $21.5 billion, an increase of almost $1 billion or 4.8 per cent on the previous year. Comparable sales increased 3 per cent for the half year, with increased momentum in the second quarter delivering comparable sales growth of 3.4 per cent.
During the half, Woolworths reported increased market share, customer numbers, basket size, items sold and sales per square metre. The supermarket group said it served an average of 21 million customers per week, an increase of 3.9 per cent on the previous half year. The effects of promotions and volumes saw a price deflation of 4.1 per cent.
“This has been achieved in a highly competitive marketplace,” said Grant O’Brien, Woolworths CEO. “We have continued our leadership in price and range, delivering more than $400 million in savings to customers predominantly through our ‘More Savings Every Day’ program,” he said.
Woolworths said the increase in gross margin reflected improvements in buying, more effective promotional activity and growth in its exclusive brands, including the expansion of its exclusive Liquor brands.
Australian Food and Liquor CODB as a percentage of sales remained flat compared to the prior half year. But Woolworths said this was “a good result given the large number of new stores which are yet to reach mature trading levels” and ongoing investment in its multi-option business.
Woolworths opened 23 Australian Supermarkets during the half year, bringing the total to 920 and employing an additional 2,000 people. The supermarket group opened six Dan Murphy’s, bringing the total to 181. Woolworths said it plans to open a further 14 Supermarkets and six Dan Murphy’s in the 2014 financial year.
Woolworths Liquor Group
The Woolworths Liquor Group delivered a strong result for the half year, with good sales growth across all three channels – Dan Murphy’s (Destination), BWS (Convenience) and The Wine Quarter (Online). Total sales for the half year (including ALH Group on premise liquor sales) of $4 billion represented an increase of 5.1 per cent on the previous year.
“The Woolworths Liquor Group again delivered growth across all three formats — Dan Murphy’s (Destination), BWS (Convenience) and The Wine Quarter (Online) and continues to lead the way in innovation,” Mr O’Brien said.
Petrol sales for the half year, including Woolworths/Caltex alliance sites, were $3.7 billion, an increase of 8 per cent on the previous year. Comparable sales (dollars) increased 6.4 per cent.
Average unleaded fuel sell prices for the half year were 150.2 cpl, compared to 141.3 cpl for the same period in the previous year.
Petrol volumes increased 0.6 per cent and comparable volumes decreased 0.6% for the half year. While competitor activity was focused on ongoing increased fuel discounts, Woolworths said its customers continued “to be rewarded through targeted fuel offers and enhanced Supermarket offers”. This impacted volumes during the half but provided positive benefits to the business overall.
Total merchandise sales increased 9.8 per cent and comparable merchandise sales increased 6.4 per cent for the half year, which Woolworths said reflected its improved convenience offer and more effective promotional activity, despite lower fuel volumes.
Petrol EBIT of $74 million increased 4.2 per cent on the previous half year assisted by the continuing shift towards premium unleaded and diesel fuels, and stronger merchandise sales. CODB as a percentage of sales decreased on the prior year despite costs associated with new petrol canopies.
Woolworths reported a growth in market share in New Zealand’s “subdued” grocery market and said it was in the early stages of transforming its Countdown business with the last quarter showing signs of “improving momentum”.
New Zealand Supermarkets’ sales for the half year were NZ$3 billion, an increase of 2.6 per cent on the previous year (15.2 per cent increase in AUD). Comparable sales for the half increased 0.7 per cent, underpinned by successful promotional activity and strong results in Fresh.
Woolworths said it continued to increase market share, customer numbers and items sold, which it said reflected the “relevance” of its offer and success of promotional activity.
The supermarket group said the result for the second quarter was “particularly pleasing”, delivering the strongest quarterly comparable sales growth seen in the last 18 months and that the early stages of its Countdown business transformation was showing signs of “improving momentum”. This was delivered despite the subdued grocery market conditions, highly competitive marketplace and price deflation across a number of key categories.
Gross margin decreased 3 bps on the previous half year, impacted by a higher level of promotional activity, particularly in Longlife. Woolworths said it had continued to increase its competitiveness in the market and had lowered shelf prices on a range of products, including through its ‘Price Lockdown’ program, which delivers customers long-term price reductions on a range of popular groceries.
CODB as a percentage of sales before significant items increased 4 bps on the previous half year, attributable to additional rental expense (net of depreciation savings) following the sale of properties to the SCA Property Group in FY13. Excluding these costs, CODB as a percentage of sales before significant items decreased 22 bps, which Woolworths said reflected “strong cost management” across the business with cost savings gained through improved productivity in distribution centres as well as in support offices.
EBIT before significant items increased 1.3 per cent to NZ$164.4 million, with the EBIT margin before significant items down 7 bps on the previous half year, impacted by the additional rental expense (net of depreciation savings) following the sale of properties to the SCA Property Group in FY13.
Excluding this, EBIT before significant items increased approximately 6 per cent and EBIT margin before significant items was up 19 bps on the previous half year.
ROFE was in line with the prior half year, however was impacted by the timing of creditor payments relative to the reporting dates. Excluding this, ROFE increased approximately 30 bps on the prior half year, reflecting EBIT growth, lower inventory and the sale of four remaining properties to the SCA Property Group, offset by continued investment in new stores and refurbishments.
Big W and EziBuy
Sales for the half year were $2.5 billion, an increase of 0.2 per cent on the previous year, impacted by the previously advised transformation of BIG W and differences in the timing of the BIG W annual Toy Sale relative to the reporting date. Trading conditions continued to be challenging with strong competition, ongoing price deflation (estimated to be 4.1 per cent for the half) and increased promotional activity, leading to a disappointing profit result for the half.
Excluding the timing impact of the Toy Sale, sales growth was approximately 2 per cent for the half. Stronger trading departments in BIG W included Toys & Sporting, Home, Childrenswear, Women’s Apparel and Office.
Comparable store sales decreased 2.3% for the half year. Excluding categories which were being rationalised as part of the business transformation, comparable sales for the half year were flat.
Woolworths said the 143 bps gross margin improvement reflected better buying, shifts in the sales mix and the acquisition of EziBuy. This was achieved despite higher levels of clearance activity in the categories being rationalised.
CODB as a percentage of sales increased 181 bps on the prior half year, which Woolworths said reflected new stores yet to reach maturity, the EziBuy acquisition and lower sales growth. As a result, EBIT of $120.5 million decreased 6.9 per cent on the previous half year.
ROFE decreased 455 bps, however was impacted by the timing of creditor payments relative to the reporting dates. Excluding this, ROFE decreased approximately 250 bps, and includes the acquisition of EziBuy as well as the continued roll out and refurbishment of BIG W stores. BIG W closing inventory decreased 2.3 days, driven by a focus on stock management.
Woolworths opened three new BIG W stores during the half year, including two new stores in the second quarter, bringing the total to 181. There are plans to open one further store in the 2014 financial year.
“We have commenced the transformation of Big W’s customer offer, replenishment systems and supply chain capabilities,” Mr O’Brien said. “We have much more to do and are focused on delivering profitable growth in the future,” he said.
“Online has been another highlight as we continue to provide customers with more convenient ways to shop,” Mr O’Brien said. “We exceeded $1 billion of sales ahead of our FY14 target. The acquisition of EziBuy has enhanced our online and direct retailing capabilities, and supports our position as Australasia’s largest domestic online retailer,” he said.
Hotel sales for the half year were $788 million, an increase of 3.8 per cent on the previous year. Comparable sales for the half year increased 2.1 per cent.
Woolworths said trading conditions were currently “a challenge”, especially in Bars and Gaming. Its Food offer remained a focus and the Group said it was seeing solid results as it concentrated on “providing value meals in a family friendly setting”.
Gross margin increased 46 bps on the prior half year, assisted by the Victorian gaming regulatory changes which cycled in August and provided an uplift to sales and profitability in the prior year and part of the first quarter.
CODB as a percent of sales decreased 179 bps on the prior half year attributable to strategic initiatives to improve efficiency in venues and the cycling of business acquisition costs in the prior year.
As a result, Woolworths said EBIT increased 16.4 per cent on the previous half year to $163.9 million. Woolworths said results from the hotels acquired as part of the Laundy transaction in the prior year were “pleasing”.
A change to tax rates in Victoria applying to revenues from electronic gaming machines was recently announced. The changes will apply from 1 April 2014 and will impact EBIT for the second half of FY14 by approximately $6 million and FY15 by $20 – $25 million.
“We are progressing our ambition to be Australia’s most responsible operator of local pubs and our focus on family friendly food offerings has delivered pleasing results,” Mr O’Brien said.
Home Improvement sales for the half year were $796 million, an increase of 25 per cent on the previous year. Masters sales for the half year were $393 million, up 49.4 per cent on the previous year.
Woolworths opened seven new stores during the half, all of which were on or ahead of schedule, bringing the total to 38 stores trading at the end of the period. The Group said it remained on track to open 18 Masters stores this financial year.
Woolworths said its Home Improvement business “remains in its development phase”, with its stores having traded, on average, for 15 months. Approximately half of the stores opened over the last 12 months were in regional and future growth areas, which Woolworths said would take longer to mature and would have sales below the long term group average.
Increasing sales per store remains a key focus and driver of the “path to profitability”, according to Woolworths.
The Masters EBIT loss was $71.9 million for the half year. Woolworths said it remained focused on executing its plan to achieve breakeven in Masters during FY16. Specifically, increasing sales per store, improving gross margin, driving efficiencies in store and increasing fractionalisation of costs in the distribution and support network as sales levels increase.
Home Timber and Hardware sales for the half year were $403 million, up 7.8 per cent on the previous year. Recently refurbished company stores were achieving “pleasing growth”, with further refurbishments planned for the second half of the 2014 financial year.
“Our Home Improvement business continues to grow rapidly and we are improving and adding to our network of stores. We are executing our plan to make Home Improvement a long-term profit contributor for the Group,” Mr O’Brien said.
Woolworths said it remained “well positioned” in its market segments and had a “strong and sustainable business model”.
Previous provided guidance for FY14 net profit after tax from continuing operations was for growth in the range of 4 per cent to 7 per cent (on a normalised 52 week basis excluding significant items).
While some of its businesses continued to experience challenging trading conditions, Woolworths said it had seen good progress against our Strategic Priorities, which had delivered sustainable profit growth for the half year.
Woolworths revised its previous guidance and now expects net profit after tax from continuing operations to grow in the range of 5 per cent to 7 per cent (on a normalised 52 week basis excluding significant items), subject to no significant deterioration in trading conditions.
“This is a pleasing result for the half year and I am confident that Woolworths is in a good position to continue to reward both its customers and its shareholders into the future,” said Ralph Waters, Woolworths Limited Chairman.